author: Trammell:

text:
    Manufacturers Insurance Agency Co. and Affiliated Companies, Michigan Underwriters Corporation, and Manufacturers Underwriting Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4135.
    Promulgated September 12, 1927.
    A corporation, 99.86 per cent of the stock of which is owned by-another corporation, held not entitled to classification as a personal service corporation.

      John T. Kennedy, Ksq., and Richard H. Wolfe, O. P. A., for the petitioners.

      J. Arthur Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax of $2,486.84 for the year 1920 resulting from the respondent’s refusal to grant the petitioner personal service classification.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of Michigan, with its principal office at Detroit. It was incorporated in July, 1914, with an authorized capital stock of $30,000, divided into 3,000 shares of a par value of $10 each, all of which was outstanding during 1920. Throughout 1920, the petitioner was engaged in operating a general insurance agency on a commission basis.
    About November, 1918, the Michigan Underwriters Corporation was organized with a capital stock of $10,000, divided into 1,000 shares of a par value of $10 each, all of which was outstanding during 1920. This corporation was engaged in the business of acting as attorney in fact for the Michigan Reciprocal Exchange, which was a Michigan association for the exchange of indemnity in workmen’s compensation insurance.

      In December, 1919, the Manufacturers Underwriting Co. was organized under tbe laws of Delaware for tbe purpose of acquiring and bolding tbe stock of tbe two corporations mentioned above, and at the time of its organization acquired all tbe outstanding stock of these companies with the exception of four shares in each company. The four shares in each company not passing to the Manufacturers Underwriting Co. were held by four individuals who owned one share each in each of the two companies. During 1920, the Manufacturers Underwriting Co. owned 2,996 of a total of 3,000 shares of the outstanding capital stock of the Manufacturers Insurance Agency Co., and 996 shares of a total of 1,000 shares of the outstanding capital stock of the Michigan Underwriters Corporation. The Manufacturers Under-writing Co. had no other business than holding the stock and receiving the dividends of the other two corporations. For each share of stock in the Michigan Underwriters Corporation acquired by the Manufacturers Underwriting Co. it issued six shares of its preferred stock and six shares of its common stock, and for each share of stock acquired in the Manufacturers Insurance Agency Co. it issued two shares of its preferred and two shares of its common stock. The shares of stock of the Manufacturers Underwriting Co. had a par value of $10.
    The stockholders of the Manufacturers Underwriting Co. during 1920 and the amount of common and preferred stock held by each were as follows:

    The stockholders of the Manufacturers Underwriting Co. who rendered services in 1920, the duties they performed, the amount of stock held, and the compensation received from the Manufacturers Insurance Agency Co. and the Michigan Underwriters Corporation were as follows:

    Sloman, Goodman, P. E. Hinckley, and Harrison were the owners of the i shares of stock in each the Manufacturers Insurance Agency Co. and the Michigan Underwriters Corporation that were not owned by the Manufacturers Underwriting Co. The officers of the Manufacturers Insurance Agency Co. in 1920 were Sloman, president, Goodman, secretary, and P. E. Plinckley, treasurer. For their services in these capacities they received salaries in the amounts shown above. Goodman was secretary and treasurer and P. E. Hinckley was assistant treasurer of the Michigan Underwriters Corporation, and in those capacities they received the amounts shown above. The amounts of $3,000 and $3,000 received by Goulson and Harrison, respectively, from the Manufacturers Insurance Agency Co., and the amounts of $3,150, $3,000, and $3,000 received by Sloman, Harrison, and Goulson, respectively, from the Michigan Underwriters Corporation, were compensation for their services as salesmen.
    During 1920, Sloman, Goodman, Harrison, and Goulson were regularly engaged in selling insurance. In addition to his work as salesman, Goodman was general manager of the three companies, and supervised the entire organization, devoting his entire time to the business of the three companies. Other stockholders who sold insurance, which was carried through the books under Goodman’s name, were C. B. Bohn, Fruehauf, Both, Grant, E. J. Woodison, Davis, Fred Christian, Wm. Christian, and C. W. Brandt. The duties of C. W. Brandt, a director, consisted of signing checks. Both, E. J. Woodison, and Talbot, who were directors, performed no other duties than those of directors. While Brandt, Both, Woodison and Talbot all procured business, they were paid no compensation direct for that service.
    Directors’ meetings were held about once every two months, and the directors were paid $10 each for every meeting attended.
    During 1920 the salaries paid nonstockholding salesmen for services rendered the Manufacturers Insurance Agency Co. amounted to $2,583.28, and for services rendered the Michigan Underwriters Corporation amounted to $4,220.78, or a total of $6,804.06.
    In carrying on its business, the petitioner secured orders for insurance eitheivdirect or through its salesmen. It then wrote the policies, billing the insured, who was expected to remit to the petitioner in due course. In turn, the petitioner remitted to the insuring company or the insurers the amount due which was the amount of the premium on the policy, less the commission. At times, notes instead of cash were accepted as premiums. The petitioner at times borrowed money from which to make payment to the insurance companies of premiums due before it had collected the premiums from the insured. As a rule, the amount owing the petitioner was in excess of what it owed. During 1920, from 30 to 40 per cent of petitioner’s business was new business, while from 60 to 70 per cent was old or renewal business. The following is a statement of the income and deductions claimed for 1920:

      The amount of $6,924.64 claimed by petitioner as a deduction for office expense represents salaries of clerks, stenographers, and general office expense.
    The balance sheets as of December 31,1919, and December 31,1920, are as follows:

    Part of the amounts of notes receivable shown above represented notes accepted by the petitioner for premiums and held by it on the dates indicated. Part of the amounts shown as notes payable represented outstanding loans obtained to make payments to the insurance companies of premiums not collected from the insured.
    The petitioner was not a personal service corporation during 1920.
   OPINION.

Trammell:

The only issue involved in this proceeding is whether during the year 1920 the petitioner was a personal service corporation.

Section 200 of the Eevenue Act of 1918 provides in part as follows:

The term “ personal service corporation ” means a corporation whose income is to he ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor * * *.

During 1920, the Manufacturers Underwriting Co., a holding company, owned 2,996 shares of the petitioner’s total outstanding capital stock of 3,000 shares. The holding company, during the year here involved, had no other business than holding the stock and receiving the dividends of the petitioner corporation and the Michigan Underwriters Corporation, which acted as an attorney in fact for an association formed for the exchange of indemnity in workmen’s compensation insurance. The remaining four shares of petitioner’s capital stock were held by Sloman, Goodman, P. E. Hinckley and Harrison, who owned one share each, and who, with the exception of P. E. Hinckley, were regularly engaged in selling insurance. Unquestionably the holding company was the principal owner or stockholder in the petitioner corporation.

We are here confronted with the question of whether a corporation is entitled to personal service classification when substantially all of its stock is owned by another corporation. This question was considered by us in Appeal of Hanley-Ried & Co., 2 B. T. A. 315. There we held that a corporation, the principal stockholder of which was another corporation, was not entitled to personal service classification. We said:

The concept underlying the whole theory of personal service corporations was to give relief to those corporations, the income of which was primarily attributable to the personal and individual activities of the principal stockholders.
We think Congress intended, that the activities be personal in the sense of being individual. Without question a corporation can not be said to have individual activities. It is an artificial entity, the activities of which are necessarily vicarious and not individual.

The foregoing principles are applicable and controlling here.

In view of the foregoing, the action of the respondent in denying personal service classification is approved.

Judgment will be entered for the respondent.

Considered by Sieekin and MoRRis.


source: Caselaw Access Project

author: MaRqttette :

license: Public Domain

text:
    Cleveland Woolen Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6029.
    Promulgated September 12, 1927.
    1. Merchandise shipped on approval or with knowledge that it was not in accordance with contract, should not be included in gross sales before acceptance by the consignee, but remains a part of the petitioner’s inventory.

      2. The amount of an allowance made in 1919 because of a falling market, on merchandise shipped in 1918, is not an allowable deduction from gross income of 1918.

      Herbert D. Cohen, Esq., for the petitioner.

      T. M. Willems, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1918 in the amount of $13,483.70. The deficiency letter asserts deficiencies and determines overassessment for the years 1910 to 1920, inclusive, and the petition alleges that the taxes for all of those years are in controversy. However, the only errors assigned relate to the year 1918.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of the State of Tennessee, with its principal office and place of business at Cleveland, Tenn. It is, and was during the year 1918, engaged in manufacturing woolens and men’s clothing, and in selling men’s clothing to the retail trade and cloth to other clothing manufacturers.
    In the year 1918 the petitioner had certain contracts for the sale of woolens and clothing but on account of labor and other difficulties it was unable to make deliveries in accordance with the contracts. In the year 1918 the petitioner also sold, subject to approval, clothing ordered from stock. Certain shipments of clothing sold subject to approval were made in the latter part of 1918, but were not accepted by the customers and were returned to the .petitioner early in the year 1919. Certain shipments of merchandise were also made by the petitioner in the latter part of the year 1918 which were known by it to be defective or otherwise not in accordance with the orders given therefor, and were not accepted by the customers to whom they were shipped but were returned to the petitioner early in the year 1919.
    In December, 1918, the petitioner shipped certain woolen cloth to Donnerstag & Co. of Chicago. Upon receipt of the cloth Donnerstag & Co. informed the petitioner that on account of falling markets it could not handle the goods unless the price were reduced. After considerable correspondence and negotiations the petitioner, in February, 1919, made Donnerstag & Co. an allowance of $1,181.19 on the goods so shipped.'
    The petitioner entered upon its books of account, as sales in the year 1918, the amount of all shipments made by it as hereinbefore set forth, regardless of whether the sales were consummated or allowances required to be made. Upon the return of such merchandise the petitioner set up on its books of account a reserve for the year 1918 to cover the amount of such returns of merchandise and the adjustment made with Donnerstag & Co. The difference between the amounts entered on the books as sales on account of goods shipped and returned, and the inventory values thereof was $2,692.41.
    The petitioner in its income-and-profits-tax return for the year 1918, included in gross sales for that year the amount of the goods shipped and returned or adjusted as hereinbefore set forth, and deducted from gross income the amount of the reserve set up to cover such returns and adjustments. The respondent disallowed the deduction.
   OPINION.

MaRqttette :

The petitioner contends that the goods shipped in the year 1918 and returned as set forth in the findings of fact, should be included in its closing inventory for 1918; that the amounts credited to sales on account of these goods should be eliminated therefrom and that its income for the year 1918, as determined by the respondent, should be reduced by the difference between the amount so charged to sales and the inventory value of the goods returned, and also by the amount of the allowance made to Donnerstag & Co.

We agree with the contention of the petitioner as to the goods shipped and returned. The shipments of goods were made with knowledge that they Avere not in accordance with the contracts, or on approval; and the customers Avere under no obligations to accept and did not accept them. The goods, therefore, remained the property of the petitioner and AAdien they were returned the effect was as if the shipments had not been made, regardless of the fact that they had been entered on the petitioner’s books as sales. Mere bookkeeping entries can not make sales from transactions which were in fact not sales, or income from something which is in fact not income. The goods returned to the petitioner belonged to it on December 81, 1918; were a part of its stock, and should have been included in its inventory as of that date, and the alleged sales price should have been eliminated from the sales account. The result is that the petitioner’s net income for the year 1918, as determined by the respondent, is overstated by the difference between the amounts included in sales on account of the goods in question and their inventory value, which difference we find to be $2,692.41, and it should therefore be reduced by that amount.

With respect to the allowance made by the petitioner to Donnerstag & Co., we can not agree that it was a proper deduction from gross income for the year 1918. There is nothing in the record to show that the shipments made to that company were not made in accordance with the sales contracts, or that they were on approval. On the other hand it appears that on account of a falling market Don-nerstag & Co. breached, or threatened to breach their contract, and that in 1919, after- correspondence and negotiations, the petitioner adjusted the controversy by making Donnerstag & Co. an allowance of $1,181.19. In other words, the petitioner compromised what appears to have been, so far as the record discloses, a valid and subsisting claim against Donnerstag & Co., and accepted in full settlement of the claim an amount less than the face value thereof. The amount in question may be a proper deduction in computing the petitioner’s net income for 1919, but is not a proper deduction for the year 1918. Appeal of Manville Jenckes Co., 4 B. T. A. 765.

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

Considered by Phillips, VaN FossaN, and Milliken.


text:
    Comey & Johnson Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11133.
    Promulgated September 12, 1927.
    Amounts withdrawn by an officer of a corporation held to represent a bona, fide account receivable and a part of invested capital of the corporation.

      Franklin G. Parks, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended November 30, 1919, in the amount of $9,359.50. Two errors were assigned in the petition, one of which was the fact that the respondent declined to compute the profits tax under section 328 of the Revenue Act of 1918. This assignment of error was waived at the hearing, leaving-in issue only the question whether the invested capital should be reduced by the amount of $37,465.06, representing money withdrawn from the corporation by the principal stockholder.
    FINDINGS OF FACT.
    The petitioner is an Ohio corporation, organized in September, 1905. Its principal office is at Cleveland. It is engaged in the business of manufacturing ladies’ straw and felt hats.
    George P. Comey was president and principal stockholder. Comey owned 334 shares of the 500 shares, of capital stock outstanding during the fiscal year 1919. Other persons owned 166 shares or 33.2 per cent of the outstanding capital stock. In 1905 Comey owned 372 shares. In 1905 his percentage of stock ownership was 74.4 per cent; at January 1, 1919, it was 66.8 per cent, and it was the same percentage at the end of 1919.
    Early in the history of the petitioner corporation Comey began the practice of withdrawing such monies as he might need from time to time for his personal use. The amount of these withdrawals varied. At regular monthly periods the withdrawal account of Comey would be credited with the amount of his authorized monthly salary, which salary during the fiscal year ended November 30, 1919, was fixed at $25,000 per annum.
    The corporation constantly authorized the payment of dividends, and the dividends payable on the shares of stock held by Comey were credited to his account on the books of the corporation. This practice was followed from the date of the organization of the corporation up to and including the fiscal year ended November 30, 1919. At the close of the fiscal year ended November 80, 1919, the debit balance in the withdrawal account of Comey amounted to $37,465.06. From the close of the fiscal year ended November 30, 1919, up to and including the fiscal year ended November 30, 1924, no dividends were declared by the corporation, and at the close of the fiscal year ended November 30, 1923, the debit balance of Comey’s withdrawal account increased from $37,465.06 to $122,000. The amount of $37,465.06 was the average monthly balance due by Comey to the corporation during the fiscal year 1919. In January, 1924, the indebtedness due by Comey to the corporation was satisfied in full by the payment of $75,000 in cash and a note for the balance, which was subsequently paid.
    Prior to 1905 Comey inherited from his father’s estate several hundred thousand dollars, which was not invested in the corporation.
    Statements submitted by the corporation to the bank from which it obtained credit, show by notation that the commercial paper of the corporation was endorsed by Comey. Balances due the corporation by Comey were included among the corporation’s assets and also in statements submitted the county taxing authorities. Comey acknowledged his indebtedness to the corporation. No other officer or stockholder of the corporation withdrew any amounts in excess of salaries or dividends credited to their account. Comey promised to repay the amounts he withdrew and acquiesced in crediting to the account salaries and dividends due him until he had paid the balance of the account in 1924. No interest was paid on the balance due by Comey.
    In determining the deficiency, the respondent excluded from invested capital of the petitioner the amount of $37,465.06, which was the average monthly balance during the fiscal year due by Comey to the corporation on account of the withdrawals.
   OPINION.

Trammell:

The question to be determined is, Was Comey indebted to the corporation in the amounts stated during the fiscal year 1919, or were the amounts that he withdrew distributions of profits ?

In determining this question all the facts and circumstances in the case must be considered. The evidence shows that since the time of the organization of the corporation in 1905, Comey had been withdrawing, for his own personal use, vario'us amounts from the corporation. His salary of $25,000 per year and dividends had been credited to the account, and subsequent to the taxable year involved $75,000 in cash was paid by Comey and a note given for the balance of the account. Comey recognized his liability to the corporation and was financially able to pay the amounts withdrawn. All of the facts, taken together, convince us that the amounts withdrawn by Comey were not distributions of profits but represented bona fide indebtedness to the corporation. The withdrawals were not to be counterbalanced merely by subsequent dividends. The amount of salary was also credited against that account and the account was finally adjusted by a cash settlement. As also indicative of the fact that the amo'unts did not represent distributions of profits or dividends, no other stockholder received or withdrew amounts in excess of salary or dividends credited to him. It would not seem reasonable that one stockholder, owning a substantial amount of stock, would permit another stockholder to withdraw money from the corporation in excess of his pro rata share of dividends and his salary unless there was to be an accounting to the corporation for such amounts.

Order of redeterrrdnation will be entered on lb days’ notice, und,er Rule 50.

Considered by Moréis, Siefkin, and Smith.


author: Teammell :

text:
    Thomaston Cotton Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10913.
    Promulgated September 12, 1927.
    Under section 1207 of the Revenue Act of 1926, invested capital at the beginning of the taxable year was properly reduced by the prorated amount of income and profits taxes for the preceding year and by the entire amount of additional income and profits taxes for years prior to that immediately preceding the taxable year.

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

      A. H. Fast, Esq., for the respondent.

      This is a proceeding for the redeterminatioii of deficiencies in income and profits taxes of $18,046.64 for 1920 and $68,018.19 for 1921. The deficiency for 1920 results in part from the action of the respondent in reducing the petitioner’s invested capital for that year by $78,295.09, representing 1919 prorated income and profits taxes, and by $215,733.49, representing the entire amount of additional income and profits taxes due for 1917 and 1918. The deficiency for 1921 results in part from the respondent having reduced invested capital for that year by $37,470.62, representing 1920 prorated income and profits taxes, and by $144,392.72, representing the entire amount of additional income and profits taxes due for the years 1916, 1917, and 1919.
    No testimony was introduced by either side. The case was submitted on an agreed statement of facts, from which we make the following
    FINDINGS OF FACT.
    In the determination of petitioner’s income and profits tax liability for 1920, invested capital was a material factor. In computing petitioner’s invested capital for that year respondent deducted therefrom $78,295.09, representing 1919 income and profits taxes prorated on the basis of the four installment dates of payment in 1920; and $215,-733.49, representing the entire amount of 1917 and 1918 additional income and profits taxes, which had not been finally determined or assessed in 1920, but which were thereafter finally determined and assessed by respondent and paid by petitioner.
    Invested capital was also a material factor in computing the 1921 income and profits tax liability, and in the computation of petitioner’s invested capital for that year respondent deducted therefrom $37,470.62, representing 1920 income and profits taxes prorated on the basis of the four installment dates of payment in 1921; and $144,-392.72, representing the entire amount of 1916, 1917, and 1919 additional income and profits taxes, which had not been finally determined or assessed in 1921, but which were thereafter finally determined and assessed by respondent and paid by petitioner.
   OPINION.

Teammell :

The only error assigned by the petitioner is the reduction of invested capital for 1920 and 1921 on account of income and profits taxes for preceding years.

Section 1207 of the Revenue Act of 1926 is applicable and controlling here. The petitioner’s contention must therefore be denied. Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168; Appeal of B. F. Boyer Co., 4 B. T. A. 180; Appeal of Randall Brothers, Inc., 4 B. T. A. 291; Appeal of Chicago Railway Equipment Co., 4 B. T. A. 452; Appeal of Manville Jenckes Co., 4 B. T. A 765; Appeal of Herald-Despatch Co., 4 B. T. A. 1096; Appeal of Henderson Cotton Mills, 4 B. T. A. 1212; E. B. Crabtree Co. v. Commissioner, 5 B. T. A. 732; Appeal of Harriet Cotton Mills, 5 B. T. A. 734; The Gazette Co. v. Commissioner, 6 B. T. A. 1016.

Judgment toill be entered for the respondent.

Considered by Siefkin, Moeeis, and Smith.


author: Trammell :

text:
    Alban Young, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles B. Young, Petitioner, v. Commissioner of Internal Revenue, Respondent. Clarence A. Young, Petitioner, v. Commissioner of Internal Revenue, Respondent. David M. Young, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8044-8047.
    Promulgated September 12, 1927.
    Evidence held, insufficient to establish value of stock at March 1, 1913, in excess of value determined by respondent.

      P. M. MacCutcheon, Esq., for the petitioners.

      L. C. Mitchell, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies in income taxes for the year 1919 as follows: In the case of Alban Young (Docket No. 8044), $2,528.59; in the case of Charles B. Young (Docket No. 8045), $704.33; in the case of Clarence A. Young (Docket No. 8046), $631.04; and in the case of David M. Young (Docket No. 8047), $1,287.13. The only question at issue in each case is the fair market value of the stock of the American Steam Laundry Co. at March 1, 1913. Each petitioner above named was a stockholder in the corporation, and since each case involves the same issue, and none other, they were consolidated for hearing and decision.
    FINDINGS OF FACT.
    In 1900, the petitioners Alban Young and David M. Young started a laundry business in the City of Charleston, W. Va., under the name of American Steam Laundry. About a year later, Alban Young bought out the interest of his brother, David M. Young, and continued to operate the laundry as sole owner until 1905, in which year he was offered $5,000 for the business. At that time, his three brothers, petitioners herein, desiring to come into the business, Alban Young decided not to sell out but to incorporate and continue the enterprise, which was done under the name of the American Steam Laundry Co. The company had a capital stock of $5,000, of which seven-twelfths was issued to Alban Young for the assets turned over by him to the corporation. The balance of the stock was issued to the petitioners Charles B., Clarence A., and David M. Young, who paid in to the corporation money in an aggregate amount equal to five-twelfths of the appraised value of the assets contributed by Alban Young.
    Some time prior to 1913, petitioners purchased a lot which they sold later at a profit of $5,000 to $8,000, which they put into the laundry business and used to buy additional equipment. Money was also borrowed from the banks from time to time with which to purchase additional equipment, and the loans were paid back out of earnings, but no additional capital was otherwise contributed to the corporation. No dividends were paid on the stock prior to 1916, and from 1905 to 1913 the- three stockholders, Alban, Charles B., and David M. Young, who devoted their entire time to the business, were paid weekly salaries ranging from $9 to $25. Petitioner Clarence A. Young was not employed by the company, and drew no salary out of the business.
    Prior to 1917, the corporation kept no books of any kind or records of its business, other than to place in an alphabetical file unpaid laundry slips.
    In 1919 petitioners sold their stock in the American Steam Laundry .Co. for $90,000, retaining cash on hand in the amount of $471.31, supplies of the value of $2,570.24, and accounts receivable of $3,630.72, making a total of $96,672.27. They paid a commission of $4,500 in connection with the sale, and assumed accounts payable in the amount of $1,209.55; bills payable, $8,000; refunds, $380.26; bank overdrafts, $2,068.70; taxes, $838.38; and officers salaries of $4,297, leaving the net amount received from the sale of stock and business of $75,378.38.
    The cost of the stock in question was less than the March 1, 1913, value. ,
    At the time of sale in 1919, Alban Young owned five-twelfths of the stock, David M. Young owned three-twelfths, Charles B. Young owned two-twelfths, and Clarence A. Young owned two-twelfths.
    Prior to 1913, the earnings from the business were only sufficient to pay small salaries to the active stockholders for living expenses, and amounts borrowed from the bank. In 1919, the business was very prosperous, and the amounts of gross income and earnings were greatly increased. In 1913, the gross income of the corporation was approximately $22,000, while for the year 1918 the gross income was approximately $88,000. For the seven months period ended August 1, 1919, the gross income was $49,000.
   OPINION.

Trammell :

The sole issue raised in these proceedings is the March 1, 1913, value of the American Steam Laundry Co.’s stock. The respondent has determined that said stock had a fair market value on said date of $20,000, whereas petitioners contend that the stock had a value at that time of $45,000.

We are not informed by the evidence as to the value of the corporate assets at the basic date, nor the amount of the net earnings of the corporation at that time. No books of account or records of its business were kept by the corporation prior to 1911, and we have no information as to what is shown by the books opened in that year. The American Steam Laundry Co. appears to have been a close corporation, all of its stock being owned from organization to the date of sale in 1919 by the four brothers who are the petitioners herein. None of the stock was sold prior to 1919, and the evidence with respect to the total amount of money invested in the business or the value of the assets at any time is very uncertain and indefinite.

The evidence in the record does not convince us that the stock had any value in excess of that determined by the respondent. Accord-mgly, the determination of the respondent is approved.

Judgment will be entered for the respondent.

Considered by Sieeicin and Morris.


author: TraMmell:

text:
    Farmers & Merchants National Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5570.
    Promulgated September 12, 1927.
    1. An amount erroneously reported as income in 1919 is not allowable as a loss in 1920 when it is determined that it was not properly reported as income in 1920.
    2. The unpaid balance of a promissory note for money borrowed was properly determined to be worthless and charged off within the taxable year, and was a proper deduction from gross income.

      H. L. Washington, Esq., for the petitioner.

      J. Artlmr Adams, Esq., for the respondent.
    This proceeding is for the redetermination of income and profits taxes for 1920 in the amount of $3,051.53. The deficiency arises through the action of the Commissioner in disallowing a loss in the amount of $1,607.60 with respect to certain dormant accounts which the petitioner had erroneously included in income for 1919 and which it had charged off in 1920, and the disallowance as deductions of certain debts which the petitioner alleged were ascertained to be worthless and were charged off during the taxable year.
    FINDINGS OF FACT.
    The petitioner is a corporation, having its office at El Dorado, Nans. It was engaged in the banking business. During the year 1919 it had on its books certain dormant accounts of depositors in the amount of $1,607.60. These accounts had been dormant for some years and during 1919 the petitioner closed them out and included the amount thereof in its taxable income. In 1920 the national bank examiner, upon examination of the books of the bank, required the bank to restore these accounts as they were in 1919 and to give the individuals credit therefor. This ivas done and the petitioner, in its return for 1920, claimed a deduction from its income on account of this transaction. The respondent disallowed the deduction.
    In 1920 one C. C. Kruger was indebted to the petitioner in the amount of $8,350.84, represented by an unsecured promissory note. Kruger had been owing the bank for some time. The bank examiner insisted that this paper be charged off. During 1920 Kruger was called into the bank and an officer of the bank agreed with him to take 120 acres of land owned by Kruger and credit his account with the amount of $5,000. This land was not worth in excess of $5,000. The difference between that amount and the amount of the indebtedness, that is, $3,350.84, was charged off the books during the taxable year.
    Kruger had no assets other than the land and the balance of the indebtedness was ascertained to be worthless in 1920.
    During 1920 the Peters Oil & Gas Co., a corporation, was indebted to the petitioner in the amount of $3,990.96. This was the unpaid balance on a note for $10,000 which the petitioner had received prior to 1920. Credits had been made on the note, reducing it to the amount stated. During 1920 it was ascertained that the Peters Oil & Gas Co. had no assets except two oil leases. During 1920 the Peters Oil & Gas Co. assigned their leases to the bank.
    One of these leases was an oil lease near Augusta and the other was near Gilroy in Williams County. Oil was being discovered near the Augusta lease in 1920, and wells had been drilled on both sides of it which were producing. Oil was being discovered within four miles of the tract on which the petitioner had a lease. Dry holes had been bored within half a mile of the other lease. The petitioner paid $40 rental in 1921 on the lease near Augusta in order to prevent the lease from lapsing.
    The amount of $3,909.90, being the unpaid balance of the $10,000 note, was charged off the books of the petitioner as a worthless debt before the close of the calendar year 1920.
   OPINION.

TraMmell:

The petitioner erroneously included in its income the amount of $1,507.60 in 1919 and at the direction of the bank examiner restored the amount to its books in 1920. The fact that the amount was not, in fact, taxable income in 1919 and should not have been, included in that year is not sufficient reason for charging the amount off as a loss in 1920. In order to entitle the petitioner to a deduction on account of a loss, the transaction must come within the provision of the statute relating to losses. The petitioner is not permitted by the statute to report income in one year and take a loss in another because it erroneously reported income in the prior year. In such a situation a taxpayer’s only remedy is to adjust its prior year’s return with respect to the income erroneously reported. If it can not do that on account of the running of the statute of limitations, that fact does not permit a loss to be taken with respect thereto in another year.

With respect to the Kruger indebtedness, it is clearly shown that Kruger had no assets in 1920 except the tract of land which he deeded to the petitioner as partial payment on his indebtedness. While the petitioner introduced some evidence to the effect that the land was not worth $5,000, which is the amount of credit allowed on the note, we are not convinced that its value was less than that amount. The difference between $5,000 and the principal of the note was ascertained to be a loss during 1920 and was charged off.

With respect to the amount of the indebtedness of the Peters Oil & Gas Co., it appears that the petitioner received during 1920, an assignment of two leases as security. The unpaid amount of the note was not ascertained to be worthless until the security was ascertained to be worthless. One of the leases was in territory where oil was being discovered and where there were producing oil wells. The petitioner paid rental on this lease during 1921 in order to prevent it lapsing and to keep it in effect. We are not convinced, from all the evidence, that this lease was ascertained to have no value during 1920 and for this reason it is our opinion that the unpaid balance on the Peters Oil & Gas Co. indebtedness was not ascertained to be worthless during the taxable year.

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

Considered by Moeeis, Siefkin, and Skiti-i.


text:
    Leggett & Platt Spring Bed Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 4343, 13112.
    Promulgated September 12, 1927.
    1. On tlie evidence, helé that the actual cash value of patent at the date paid in for stock has not been established.
    2. On the evidence, helé that the March 1, 1913, value of the patent has not been established.
    3. Adjustment of invested capital on account of additional income and profits taxes for prior years approved.

      Milo A. Lang, Esq., for the petitioner.

      JoJin D. Foley\ Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes of $5,969.65, $3,463.87, and $2,989.61 for the years 1919, 1920, and 1921, respectively. In Docket No. 4343 for the years 1919 and 1920 the respondent admits that the net income as shown in deficiency letter dated March 24, 1925, should be reduced for the year 1919 by $2,460.92, representing depreciation in the amo'unt of $1,289.37, and by loss by fire in the amount of $1,171.55. The remaining questions in controversy for the years 1919 and 1920 are as to the amount at which a patent alleged to have been acquired for stock should be included in invested capital, and what the value of the patent was on March 1, 1913. The issues in Docket No. 13112 are the same as those for 1919 and 1920 with an additional question as to the adjustment of invested capital for 1921 on account of additional income and profits taxes for the preceding two years.
    FINDINGS OF FACT.
    The petitioner is a Missouri corporation organized February 23, 1901, and having its principal place of business at Carthage. It is engaged in the manufacture and sale of patented bed springs. At the time of its organization, it acquired certain patents from a partnership. On May 12,1908, there was issued to J. P. Leggett Patent No. 887664, relating to a frame for supporting and confining coiled springs.
    About March 1, 1909, the corporation issued $150,000 par value of its captial stock in payment for the patent owned by Leggett. Leg-gett assigned the patent orally and turned over the original letters patent issued to him to the corporation, which has at all times since been operating under the patent, and has treated and considered it as its own. At Leggett’s direction, the stock was not issued directly to him alone, but was distributed among all the stockholders of the corporation in proportion to the amount of stock previously owned by them, Leggett receiving only his proportional share.
    Leggett was one of the organizers of the petitioner corporation and one of its principal stockholders. In March, 1909, he was its president and general manager and remained such until the time of his death in May, 1921.
    During the five years prior to 1908 and the four years subsequent thereto, the corporation paid dividends as follows:

    The following sales of capital stock were made during the years 1912 and 1913:

    These persons were all residents of Carthage, Mo., and purchased the stock at par. The last of the above-named sales was made on October 1, 1913.
    The petitioner was originally incorporated with a capital stock of $150,000. This was increased to $350,000 on March 1, 1909, and to $500,000 during 1914. Petitioner’s capital stock was also $500,000 on December 31, 1920.
   OPINION.

Trammell:

The petitioner contends that it should be allowed to include in its invested capital for the years 1919, 1920, and 1921 an amount of $150,000, representing the value of the patent acquired from J. P. Leggett in 1909 for stock; that it should be allowed a deduction each year on account of exhaustion of the patent; and that no adjustment should- be made in its invested capital for 1921 on account of additional income and profits taxes for 1919 and 1920.

The respondent contends that petitioner never acquired the patent, inasmuch as Leggett did not by an instrument in writing transfer or assign it to the corporation as required by the Revised Statutes, and denies that he committed error in excluding from invested capital the amount of $150,000 with respect thereto, contends that no amount should be included on account of such patent and that no amount should be allowed as a deduction on account of the exhaustion thereof. The respondent further contends that no error was committed in adjusting the petitioner’s invested capital for 1921 on account of additional income and profits taxes for the preceding two years.

Relative to the petitioner’s contention as to including the patent in its invested capital at $150,000, section 325 of the Revenue Acts of 1918 and 1921 provides as follows:

(a) That as used in this title—
The term “intangible property” means patents, copyrights, secret processes and formulae, good will, trade-marks, trade-brands, franchises, and other like property * * *.

Section 326 of the same acts provides:

(a) That as used in this title the term “ invested capital ” for any year means (except as provided in subdivisions (b) and (c) of this section) :
*******
(4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest * * *.

In order to determine the amount at which the patent may be included in invested capital it is necessary to know (1) the actual cash value of the patent at the time it is claimed to have been transferred to the corporation in 1909, (2) the par value of the stock issued therefor, and (3) the total par value of the corporation’s stock outstanding at March 3,1917. If any one of these is unknown, it can not be determined at what amount the patent should be included in invested capital.

The only evidence submitted by the petitioner in support of its contention that the patent had an actual cash value of $150,000 at the time it was paid in in 1909 was a statement of the dividends paid during the five years prior to 1908 and the four years subsequent thereto. The dividends paid during any year are by no means conclusive of the earnings of that year. Such dividends may represent undistributed earnings of a prior year or years. In any event no evidence was submitted to show what part, if any, of the dividends paid subsequent to 1908 was attributable to the patent in question. So far as the evidence shows, the petitioner’s dividends might have been attributable to any one or a combination of a number of things other than the particular patent.

The fact that $150,000 par value of the stock was issued for the patent is not of itself sufficient to establish the actual cash value of the patent at the time paid in. Appeal of Barnes Coal & Mining Co., 3 B. T. A. 891; Appeal of Wallis Tractor Co., 3 B. T. A. 981. From the evidence before us, we are unable to find that the patent at the time paid in had an actual cash value of $150,000 or any other amount. The action of the respondent in refusing to include the patent in invested capital must therefore be approved.

With respect to the allowance of a deduction for the exhaustion of a patent acquired prior to March 1, 1913, we said in the Appeal of Cheatham Electric Switching Device Co., 1 B. T. A. 984:

It is incumbent upon the taxpayer to produce facts sufficient to establish a value as of March 1, 1913, for its patents before it can be allowed deductions for exhaustion in subsequent years * * *.

In support of its contention that the patent had a value on March 1, 1913, the petitioner submitted evidence showing that during the years 1912 and 1913 its stock was selling at par. To our minds, such sales are not conclusive as to the value of the patent on March 1, 1913. The fact that the stock was selling at par could have been due to the value of other patents owned by the company, to other property owned by it, to the earnings which might have been as great even though the petitioner did not have this patent, or to the confidence the purchasers of the stock had in the officers in charge of the corporation or other reasons. The action of the respondent in refusing to allow deductions on account of exhaustion of the patent is therefore approved.

Inasmuch as the evidence fails to establish the actual cash value of the patent at the time it is claimed to have been transferred to the corporation in 1909 as well as its value at March 1, 1913, it becomes unnecessary to consider the contention of the respondent that the petitioner never acquired the patent.

With respect to the petitioner’s contention that no adjustment should be made in its invested capital for 1921 on account of additional income and profits taxes for 1919 and 1920, section 1207 of the Revenue Act of 1926 is applicable and controlling. Since it has not been shown that the adjustment made by the respondent is not in accordance with the statute, his action is approved. Appeal of Russel Wheel & Fowndry Co., 3 B. T. A. 1168; Appeal of B. F. Boyer Co., 4 B. T. A. 180; Appeal of Manville Jenckes Co., 4 B. T. A. 765; E. B. Crabtree Co. v. Commissioner, 5 B. T. A. 732.

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

Considered by SieekiN, Smith, and VAN FossaN.


author: MtjRdock:

text:
    S. L. Becker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9949.
    Promulgated September 12, 1927.
    1. Pair market value of accounts receivable at tlie time of the dissolution of a corporation determined.
    2. Revenue agents’ reports not shown to have been used by the Commissioner in the determination of the deficiency held to be irrelevant and immaterial to the issue.

      Frank Reagan, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
    Individual income taxes for the year 1918 in the amount of $6,792.85 are in controversy.
    The petitioner alleges that the Commissioner erred in determining (1) that certain assets received by the petitioner in 1918 upon the dissolution of the Union Furniture Co. produced a profit which is taxable to the petitioner, even though the petitioner had made a corporation return and paid a tax on the cash realized from these assets; (2) that the fair market value of the accounts receivable taken over by the petitioner from the Union Furniture Co. at the time of its dissolution in 1918, was equal to their face value; (3) that petitioner’s opening inventory as of October 1, 1918, amounted to $14,374.54 instead of $6,619.75; (4) that the amount of merchandise purchased by the petitioner was only $6,683.81 instead of $14,638.62, as shown by his books, and (5) that all of the alleged surplus included in the corporation’s net worth as of September 30, 1918, and taxed by the Commissioner against the petitioner as a liquidating dividend in the amount of $44,388.04 was earned subsequent to March 1, 1913, instead of determining that of this amount $23,636.51 was earned prior to March 1, 1913.
    The Commissioner and the petitioner have agreed upon certain other items of the petitioner’s income and with these we are not concerned in the present case.
    FINDINGS OF FACT.
    The petitioner is an individual residing in Macon, Ga. Since 1902, he has been engaged in the retail furniture business, selling largely on the installment-credit plan. On or about February 15,1912, the petitioner, Louis Snyder and H. D. Kaplan, organized and incorporated the Union Furniture Co., with a capital stock of $5,000. At that time they entered into an agreement which provided that the petitioner and Snyder should each own 8 shares of stock and that Kaplan should own the remaining 34 shares. The petitioner and Snyder were to pay $800 cash for their stock at the time of the organization of the corporation. Thereafter each of them was to receive a salary of $75 per month, $40 of which was to be withdrawn and the remaining $35 was to be paid to H. D. Kaplan as payment on the purchase by each of additional stock at par and as payment of 7 per cent interest on the balance of the purchase price thereof until each should own 16 shares, leaving Kaplan with 18 shares.
    In the course of time the petitioner acquired all of the corporation’s capital stock. He paid for this stock as follows:
    On or about January 25, 1912- $520. 00
    By monthly payments of $35 on 16 shares_ 1, 080.00
    In 1916 in payment for 8 of Snyder’s 16 shares- 2, 900.00
    In July, 1918, in payment for the remaining 26 shares, all of which were owned by Kaplan_:_ 10, 000. 00
    Total- 14,500.00
    Throughout its entire existence the corporation kept its books and made its annual income and profits-tax returns by the cash receipts and disbursements method, which the respondent concedes was the correct method under the circumstances.
    Petitioner has always made his individual income-tax returns by the cash receipts and disbursements method.
    The corporation conducted a retail furniture business selling largely on the installment credit plan, up to and including the 30th day of September, 1918. On that day it surrendered its charter and a few days later was dissolved. From October 1 to December 31, 1918, the petitioner continued to conduct the business using the same store, the same books and the same name as the corporation had previously used.
    On October 1, the petitioner took over the assets of the corporation. At that time he did not take an inventory or close the books of the corporation. Thereafter he kept no separate account of collections made on the corporation’s accounts receivable, nor of the receipts from the sales of merchandise which he acquired from the corporation and thereafter sold. The last inventory that had been taken was taken at the beginning of the calendar year 1918.
    Early in 1919, the petitioner consulted the Internal Revenue Agent in charge at Macon, Ga., and on the latter’s advice the petitioner made a corporation income-and-profits-tax return on Form 1120 in the name of the Union Furniture Co. for the full 12-month period, covering the calendar year 1918. This return showed that tax was due in the amount of $239.90, and that $80 of this amount was paid at the time of filing the return. Attached to the return was an affidavit of the petitioner stating that the Union Furniture Co. was dissolved on October 2, 1918, but that the return was for the entire year 1918.
    The peitioner did not file an individual income-tax return for 1918, believing that the corporation return was all that was necessary. The balance sheet as of December 30, 1918, which was used by the Commissioner in determining the net date of dissolution, is as follows: worth of the corporation at the

    In this balance sheet accounts receivable were included at their face value. From the net worth as thus determined the Commissioner deducted $14,500 as the cost of the stock and included the remainder in the petitioner’s income for 1918 as a liquidating dividend.
   OPINION.

MtjRdock:

The petitioner’s first allegation of error was denied by the respondent, is not supported by the evidence and, if we understand it correctly, is without merit. The petitioner filed a corporation income-tax return for the full year and paid some tax on the basis of this return, whereas the corporation should have filed a corporation income-tax return for a portion of the year and the petitioner should have reported the income from this same business for the last three months of the year in his individual income return for that year. In such a situation he is not relieved from paying his tax computed on a proper basis merely because the corporation paid tax calculated on an improper basis.

Apparently his third allegation of error was abandoned. At any rate it is not supported by the evidence, for revenue agents’ reports which have not been shown to have been used by the Commissioner in determining the deficiency are irrelevant and immaterial to this issue.

In support of the fourth allegation of error it was proven that after September 30, 1918, the petitioner’s books showed that $14,638.62 had been paid for goods purchased. But the testimony of the petitioner himself in regard to these purchases was so confusing that we are unable to say whether the goods were purchased by the corporation or by the petitioner as an individual. In addition we have never been shown what the Commissioner did in regard to these purchases and we are unable to say that what he did was in error.

The petitioner’s fifth contention was denied and to support it a reconstructed balance sheet of the corporation as of March 1, 1918, was offered in evidence. This balance sheet was supposed to show the earnings of the corporation as of that date, but on cross-examination it was shown to contain material errors. Even had it been accurate we would need to know other facts before we could decide that earnings of years prior to March 1, 1918, were distributed in 1918.

On all of the above points we sustain the Commissioner.

There is left for our further consideration only the second allegation of error in regard to the fair market value of the accounts receivable at the time they were taken over by the petitioner as an individual. The petitioner called two witnesses and also testified himself to prove that these accounts receivable were worth only 45 per cent of their face value. Each of the three witnesses was allowed to testify without objection that in his opinion these particular accounts receivable had a fair market value of not more than 45 cents on the dollar. Each witness was familiar with the accounts receivable of the Union Furniture Co. on September 30, 1918. Each had had experience buying and selling other accounts of a similar nature. Their testimony was not weakened on cross-examination and was not contradicted or qualified in any way. Therefore, we hold that these accounts receivable should be taken at 45 per cent of their face value in determining the profit which the petitioner received from the corporation at the time of its dissolution.

Judgment will be entered in accordance with the foregoing ofinion on notice of 15 days, under Rule 50.

Considered by SterNhagen and AetjNdbll.


author: Lansdon:

text:
    A. H. Van Hook, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. A. H. Van Hook, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9358, 9359.
    Promulgated September 15, 1927.

      Helé, that the amount of $7,500 was erroneously added to the income of the petitioner for the year 1923.

      Walter E. Barton, Esq., for the petitioners.

      A. II. Fast, Esq., and J'ulien G. Gibbs, Esq., for the respondent.

      The respondent has asserted deficiencies in income taxes against each of the petitioners for the years 1922 and 1928, in the respective amounts of $1.57 and $490.58. Two issues are involved, viz, (1) whether the petitioners sustained a loss in the amount of $5,000 in the year 1923, resulting from the shrinkage in value of certain stocks owned by them, and (2) whether, in 1923, A. H. Van Hook received certain stock of the par value of $7,500 in payment for personal services. By agreement of counsel for the parties, the two proceedings were consolidated for hearing and decision.
    FINDINGS OF FACT.
    A. H. Van Hook and Mrs. A. H. Van Hook, during the taxable years, were husband and wife, living together at Shreveport, and constituting a marital community under the laws of Louisiana. During the taxable years, and, for many years prior thereto, A. H. Van Hook was an attorney, practicing his profession in Shreveport. About 1898 he began to render some services to one Captain Youree, a man of large means, who died about 1914. After the death of Youree, he was retained by the widow of Captain Youree, Mrs. Betty Scott Youree, and her daughter, Mrs. Susie Bose Youree Lloyd, to act as their agent, and to have general charge of their large property interests. For his services as such agent the petitioner, at first, received a salary in the amount of $150 per month, which later, and during the taxable years, was increased to the amount of $200 per month.
    Among other properties owned by the Yourees was an undivided three-fourths interest in a plantation of about 1,100 acres, known as Upper Harts Island. The remaining interests in this plantation were owned by relatives of the Yourees. In the year 1923, acting as the agent of the owners, Van Hook sold this plantation to A. C. Steere Co., Inc., hereinafter sometimes referred to as the Steere Company, for the amount of $200,000. The contract of sale provided that the Youree interests should make the deed to any party designated by vendee.
    After entering into a contract to purchase the Upper Harts Island Plantation, the Steere Company caused the South Highlands Co., Inc., to be organized with authorized capital in the amount of $300,000, and assigned the contract for' the purchase of the Upper Harts Island Plantation to such company in exchange for stock thereof of the par value of $50,000. Other stock of the South Highlands Co., Inc., in the amount of $50,500, was issued for lands other than the Harts Island property, and the remainder of such stock was issued to the Steere Company and relatives of the president of such company for cash at par. Resulting from these various transactions, the South Highlands Co. acquired the Upper Harts Island Plantation and its entire authorized capital was issued.

      About the time of the organization of the Highlands Company, A. C. Steere, president of the Steere Company, offered to present to Van Hook shares of such company of the par value of $7,500. The petitioner declined the gift so offered, but expressed his desire to invest in the stock on equal terms-with the original owners, and thereupon purchased stock of the South Highlands Co., Inc., of the par value of $32,500 from A. C. Steere, and paid therefor the amount of $25,000.
    The petitioner, Van Hook, received no compensation for his services in negotiating the sale of the Upper Harts Island Plantation other than his regular salary of $200 per month for acting as agent for the Yourees. He received no compensation from A. C. Steere, the A. C. Steere Co., Inc., or the South Highlands Co., Inc., for his services in connection with the sale of such plantation.
    Upon audit of the income-tax returns of the petitioners for the year 1923, the respondent added the amount of $7,500 to the income of Van Hook as compensation for services rendered to the A. C. Steere Co. in connection with the sale and purchase of the Upper Harts Island Plantation.
   OPINION.

Lansdon:

The evidence is conclusive that the petitioner, Van Hook, purchased no stock from A. C. Steere Co., Inc.; that $25,000 was the purchase price of the stock which he acquired from A. C. Steere, and that he received no fee or compensation of any sort from A. C. Steere Co., Inc., in connection with the purchase of the Upper Harts Island Plantation, in which transaction he acted only for the Yourees. On this point the determination of the respondent is reversed.

At the hearing counsel for the petitioners waived their second contention and, therefore, the determination of the respondent that no loss was sustained by the petitioners on account of shrinkage in value in the taxable year of certain stocks is approved. No evidence was offered as to the deficiency for 1922, and the determination of the respondent for that year is approved.

Judgment will be entered on 15 days’ notice, u/nder Rule 50.

Considered by Sternhagen and Artjndell.


author: Sternhagen:

text:
    George A. Aubrey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4409.
    Promulgated September 15, 1927.

      George A. Aubrey pro se.

      T. M. Mather, Esq., for the respondent.
   Sternhagen:

Deficiency in income tax of $76.35 for 1923. Respondent disallowed deductions for alleged expenses and bad debts.

FINDINGS OF FACT.

In 1928, petitioner made personal loans to four persons of $717.50, $100, $236, and $475, respectively, each of which was ascertained to be worthless and charged off in the year 1923.

Petitioner paid ordinary expenses of carrying on his business of selling goods on commission amounting to $700.

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

Considered by Lansdon and Aeundell.


author: SteRNIíagen :

text:
    Commercial Furniture Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6507.
    Promulgated September 15, 1927.

      Paul F. Myers, Esq., for the petitioner.

      G. H. Curl, Esq., for the respondent.
   SteRNIíagen :

This proceeding involves a deficiency of $3,171.94 for 1919, the portion in controversy arising from the respondent’s action in disallowing alleged losses upon the sale and destruction of certain houses.

FINDINGS OF FACT.

The petitioner is an Illinois corporation with its principal place of business in Chicago, at 2739 West Chicago Avenue, in or near an Italian settlement.

In May, 1919, the petitioner purchased three houses and lots at 2706, 2708, and 2710 West Superior Street, immediately contiguous to its property on the east.

The house at 2706 was a two-story brick dwelling. For this house and lot petitioner paid $2,450.

The house at 2708 was a three-story frame dwelling. For this house and lot petitioner paid $2,150.

The house at 2710 was a two-story frame dwelling. For this house and lot petitioner paid $1,850.

In addition to these amounts the petitioner paid $454.94 as expenses incidental to the transfer of title.

At that time the value of the lots alone was not in excess of $1,000 each. The petitioner in making the purchases estimated it was paying $3,000 for the lots, exclusive of the improvements thereon, and considered that the balance of the purchase price was paid for the dwelling houses thereon.

' At the time of the purchase of these properties building costs were higher than they had been, and it was the petitioner’s intention to sell the dwellings for removal to other vacant property in the neighborhood, at prices, in each instance, in excess of the portion of the purchase price allocated to the dwellings.

Within a few days after their purchase the houses were broken into and stripped of all plumbing, piping, and fixtures of every kind. About June 1, 1919, the house at 2708 burned.

An offer of $375 was received for the house at 2706, but was refused. It was found, however, that the cost of repairing and moving the houses and preparing foundations therefor was so great that they could not be sold as originally intended. After the houses had been stripped, vagrants and tramps began sleeping in them. Upon being requested by the police department to do something about the matter, the petitioner sold the remaining two buildings for destruction. On June 10, 1919, the house at 2710 was sold for $40, and on November 26,1919, the house at 2706 was sold for $35.

The cost of the lots was $3,211.60, and the cost of the buildings was $3,693.34. From the sale and destruction of the buildings petitioner in 1919 sustained a loss of $3,618.34.

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

Considered by LaNsdoN and ARundell.


author: ARTJndell:

text:
    Piedmont-Mt. Airy Guano Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8542.
    Promulgated September 16, 1927.
    1. Sale of property held not to be within the provisions of section 234(a) (14) of the Revenue Act of 1921.
    2. March 1, 1913, value of land for purpose of computing gain or loss determined.

      Theodore B. Benson, Esq., and Edgar T. Wagner, Esq., for the petitioner.

      J. W. Fisher, Esq., for the respondent.
    A deficiency in income taxes has been determined by the Commissioner for the calendar year 1920 in the amount of $16,306.51. Petitioner alleges that respondent erred in his determination of the March 1, 1913, value of the site on which its plant was located and in refusing to treat the proceeds from the sale of the property under section 234(a) (14) on the ground that the sale was made because of the imminence of condemnation proceedings.
    FINDINGS OP PACT.
    In 1903 petitioner purchased for $31,000 a tract of land containing 1.88 acres at Locust Point, facing on the inner harbor of the City of Baltimore, Md., and within the city limits. Located thereon was a plant in which petitioner engaged in the manufacture of fertilizer. The process of manufacture required the use of sulphuric acid, which resulted in heavy acid fumes being given forth which were destructive to near-by property and offensive to residents of the neighborhood. The fumes had a most irritating effect on the eyes, causing them to become inflamed, and also affected the mucous membrane of the eyes and air passages. Complaints had been made from time to time to the city authorities and also directly to the petitioner, and certain city officials had called on officers of petitioner with a view to seeing what, if anything, could be done to remedy the situation.
    In 1920 petitioner sold its plant on Locust Point, including the land on which it ivas located, to the American Sugar Co., which latter company immediately tore down the buildings formerly used by petitioner and utilized the property for other purposes. Immediately upon closing the sales contract petitioner purchased a plant site on Curtis Bay and proceeded to build thereon a plant at a cost of $850,000, which plant was larger and more modern, though not as conveniently located, as the plant at Locust Point.
    The price received by petitioner for the land and buildings at Locust Point was $268,082.50. The gross cost of the buildings and machinery at the date of sale ivas $191,349.53 and the depreciation charged off and allowed was $10,851.80, leaving a net cost for the improvements of $180,497.73. In computing the total cost of the property for the purpose of determining the gain thereon, respondent added to the net cost of the improvements the amount of $37,000 as representing the cost of the land, thus making a total cost of $217,497.73 and determined a net profit on the sale of $50,584.77. The difference between the cost of the land as used by respondent of $37,000 and the original actual cost of $31,000, viz, $6,000, represented the cost of certain additional improvements other than buildings and machinery, which improvements were subsequently destroyed and the cost thereof does not enter into the computation of gain or loss.
    The fair market value of the site at Locust Point, not including buildings and machinery, as of March 1, 1913, was $70,000.
    In an appeal by this petitioner for the years 1917 and 1918 it was held entitled, under section 234(a) (14) of the Revenue Act of 1921, to deduct from the proceeds of insurance the amount thereof used in replacing the property destroyed by fire. Piedmont-Mt. Airy Guano Go., 3 B. T. A. 1009.
   OPINION.

ARTJndell:

Section 234 (a) (14) of the Revenue Act of 1921, which is applicable to transactions under prior revenue acts, reads as follows:

If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (A) its destruction in whole or in part, (B) theft or seizure, or (0) an exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of -other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. The provisions of this paragraph prescribing the conditions under which a deduction may be taken in respect of the proceeds or gains derived from the compulsory or involuntary conversion of property into cash or its equivalent, shall apply so far as may be practicable to the exemption or exclusion of such proceeds or gains from gross income under prior income, war-profits and excess-profits tax Acts.

The evidence is entirely insufficient to warrant the conclusion that petitioner sold its property because of the imminence of condemnation proceedings. There were located on Locust Point several fertilizing plants and the record would indicate that one of these plants is still operating there, though it is said that it is not so obnoxious as was petitioner’s plant. While complaints were made, there is no evidence of official action being taken or seriously contemplated by the authorities. Cf. The Davis Co. v. Commissioner, 6 B. T. A. 281.

This leaves for consideration solely the question of the value of the real estate on March 1, 1913. There was no dispute between the parties as to the value of the improvements. The only evidence as to the value of the land was that offered by petitioner which was in the form of opinion evidence by qualified real estate men. Their evidence leaves us in little doubt that the land was on March 1, 1913, of a value of at least $70,000 and this figure should be used in determining the profit, if any, on the sale of petitioner’s plant at Locust Point in 1920.

Any change in invested capital for the taxable year which may result from the decision in Piedmont-Mt. Airy Guano Co., 3 B. T. A. 1009, should be adjusted in the recomputation to be made under the decision in the present proceeding.

Judgment will he entered on 15 days’ notice, u/nder Rule 50.

Considered by Steiinhagen and Lansdon.


author: StbRNHAGen :

text:
    Samuel Greenbaum, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10692.
    Promulgated September 16, 1927.
    The expense of repair of a frozen water pipe in a house no longer used as taxpayer’s residence held not deductible as a loss under section 214 (a)(6), Revenue Act of 1921.

      John, J. WiWberg, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
    This proceeding involves a deficiency of $93.67 for the year 1923, which arises from the respondent’s disallowance of an alleged loss of real property.
    findings of fact.
    The petitioner is a resident of New York City. For over 25 years prior to June 1, 1923, he owned and occupied a residence at 2 East 94th Street. On that date the house was closed and boarded up and since then has never been occupied by the petitioner or- his family as a residence. The house was completely dismantled and all the furniture and belongings were removed to petitioner’s new residence at 17 East 84th Street.
    At that time the house was put on the market for sale and held and treated by the petitioner as a business investment.
    During the month of December, 1923, a water pipe in the cellar froze and burst, causing a flood in the cellar. Repairs and replacements necessary because of this accident were made at a total cost of $1,154.17, payment of which was made during the month of March, 1924.
   OPINION.

StbRNHAGen :

The petitioner claims under section 214 (a) (6) of the Revenue Act of 1921. In our opinion he has not brought himself within the provision invoked. There is a clear distinction between an expense of maintenance and repair, whether arising through ordinary wear and tear or through extraordinary damage, and a loss of the property itself. All householders are called upon to sustain the expenses of repairs. A frozen water pipe is a common occurrence. When it takes place in a business building the cost of repair is an ordinary and necessary expense. But since similar household repairs come within the category of “ personal, living, or family expenses,” their deduction is expressly prohibited by section 215 (a). It can not be supposed that such prohibition is to be circumvented by calling the outlay a loss. In such a sense every outlay is a loss.

It is plain from the language of section 214 (a) (6) that the losses contemplated are losses of the property itself and not the cost of repair or replacement; for the measure of the loss is either the cost of the property or its value on March 1, 1913, if acquired prior thereto. This is inconsistent with the idea that the loss is to be either measured or characterized by the cost of repair or replacement. In the present case even if the petitioner were correct in theory he would necessarily fail because there is no evidence either of cost or of the March 1, 1913, value of the property lost.

Judgment will he entered for the respondent.

Considered by Lansdon and Arxtndedl.

       Sec. 214. (a) That in computing net income there shall be allowed as deductions :'
      *******
      (6) Losses sustained during the taxable year of property not connected with the trade or business * * * if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise. * * * In case of losses arising from destruction of or damage to property, where the property so destroyed or damaged was acquired before March 1, 1913, the deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913.


author: Milliken: Phillips,

text:
    Hidalgo Steel Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11194.
    Promulgated September 16, 1927.
    A liability to respond in damages for breach of contract occurring in 1920, which petitioner does not admit but upon which liability is denied even up to settlement of case in open court in 1923, is not a proper deduction for the taxable year in which the breach occurred.

      F. E. Beeves, G. P. A., for the petitioner.

      T. M. Mather, Esq., for the respondent.
    This proceeding results from the determination by respondent of a deficiency in income and excess-profits taxes for the calendar year 1920, amounting to $1,307.45.
    Petitioner avers error was committed with reference to but one issue — a reserve of $4,000 for a loss due to breach of contract should be allowed as a deduction from income in 1920, the year in which the breach occurred, and not in a later year when judgment was rendered.

      FINDINGS OF FACT.
    Petitioner is a New York corporation with office in New York City. Petitioner filed an income-tax return for 1920, reporting net income of $5,551.97 after the deduction of a reserve of $4,000 for a loss due to a breach of contract in 1920. Respondent disallowed the deduction claimed.
    Early in December, 1919, the representative of petitioner brought into the office of petitioner an oral order from the New York Oversea Co., Inc., for 2,000 boxes of tin plate. This order was confirmed by letter from vendee dated December 3, 1919, providing specifically for 2,000 boxes of Coke Tin Plate at $7.50 per 100 pounds, base, f. o. b. Pittsburgh, specifications to be forwarded before the end' of the month, terms 1 per cent for cash. A credit in the 'amount of $15,000 was opened by the Guaranty Trust Co. of New York in favor of petitioner, upon instructions from the New York Oversea Co., Inc., and petitioner was notified thereof under date of January 9, 1920. It provided that drafts were to be accompanied by invoices and a full set of bills of lading. The letter of credit provided for expiration on February 28, 1920, unless sooner revoked. Petitioner carried no inventories and depended upon contracting for the purchase of the tin plate and steel it was regularly engaged in dealing in. It placed an order for the 2,000 boxes of tin plate with Philip P. Smith, Inc. A letter dated January 15, 1920, from New York Oversea Co., Inc., to petitioner, provided that “ our specifications of December 29, 1919, * * * should read as follows: 2,000 cases — 20x28: 56 sheets per case of 107 lbs. in weight, all prime, packed in wooden cases, iron strapped.” On January 22, 1920, petitioner wrote the New York Oversea Co., Inc., certifying that the shipment of the 2,000 boxes of tin plate was held up otving to a steel and coal strike. Petitioner was never able to secure shipment of the tin plate by Philip P. Smith, Inc., but continued to make promises to the New York Oversea Co., Inc., that shipment would be made. The attorneys for the New York Oversea Co., Inc., made written demand on petitioner, under date of June 16, 1920, for shipment of its goods or for authorization to purchase the tin plate in the open market at a price of $11.25 per box, at which price they held an option expiring at 2 p. m., on June 16, 1920. This letter also invited suggestions. Petitioner did not authorize the New York Oversea Co. to make the purchase. Philip P. Smith, Inc.-, went into bankruptcy in October, 1920. Petitioner filed a claim and participated in a small way in the distribution by the trustee in bankruptcy. Petitioner endeavored to compromise the breach of contract with the New York Oversea Co., Inc., but made no definite offer, although advised by its attorney it was liable for the breach of contract. It endeavored to secure the tin plate in New York but was unsuccessful. Early in 1921, when closing its books and making up its income-tax return for 1920, petitioner accrued an estimated liability of $4,000 for the loss through the breach of contract by setting up on its books a reserve for that amount. The New York Oversea Co., Inc., entered suit against petitioner in May, 1921, and in November, 1923, after the case was heard on the merits, the parties entered into a stipulation that the amount of damages was $5,500, and the plaintiff would accept in settlement payments of cash aggregating $4,500. A verdict was directed in accordance with the stipulation. The $4,500 agreed on was actually paid in cash.
   OPINION.

Milliken:

We have had occasion, previously, to consider the question relative to losses arising out of the breach of a contract, and it is well settled that if the liability was not admitted, or an offer in settlement was not made, or the estimated amount of the loss was not entered on the books for the taxable year, a deduction of the loss in the year when the breach occurred, was unallowable. Appeal of Brighton Mills, 1 B. T. A. 392; Appeal of New Process Cork Co., 3 B. T. A. 1339; Appeal of Bump Confectionery Co., 4 B. T. A. 50; Appeal of Hamler Coal Co., 4 B. T. A. 947. Where admission of the liability was made, and the amount of an estimated loss accrued upon the books, however, a deduction was allowable in the year of the breach. Appeal of Producers Fuel Co., 1 B. T. A. 202; Raleigh Smokeless Fuel Co. v. Commissioner, 6 B. T. A. 381. The issue in the instant case, therefore, rests upon the relation of the evidence adduced to the above principles discussed fully in the opinions cited. After a careful consideration of the record, we are satisfied that the petitioner was fully advised of the probability of loss and that a reserve amounting to $4,000 was actually entered upon the books at the end of the year 1920, but we are unable to find that petitioner ever admitted to the other party its liability or made any offer of a specific sum in discharge thereof. Indeed, it carried its denial of liability based upon pleading the statute of frauds, to the very close of the trial, which occurred in 1923. The record is replete with letters received by petitioner from the New York Oversea Co. throughout the year 1920, demanding performance under the contract or requesting authority to purchase tin plate in the open market, but there is no evidence of a reply from petitioner admitting the liability or making any move in settlement thereof. We are, therefore, of opinion that the reserve is not deductible in 1920, and the respondent is sustained.

Reviewed by the Board.

* Judgment will be entered for the respondent.

Phillips,

dissenting: In my opinion, the petitioner incurred liability in 1920 to respond in damages for breach of its contract. While the amount was not determined until a future year, it seems clear that when paid, it was not an expense of doing business in the year of payment, but an expense of the business of the year when the breach occurred, and is properly to be considered before the income of that year can be determined. The fact that the amount was not liquidated or the liability admitted, seems unimportant. The principles to be applied do not seem to differ materially from those laid down by the Supreme Court in United States v. Anderson, 269 U. S. 422; 5 Am. Fed. Tax Rep. 5674. I dissent from the decision reached.


author: Littleton:

text:
    Cincinnati Mining Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8427.
    Promulgated September 16, 1927.
    In the absence of an agreement among affiliated corporations as to the proportion in which any tax found to be due shall be assessed upon them, such tax as may be determined shall be assessed upon the members of the affiliated group upon the basis of the net income properly assignable to each.

      Richard S. Doyle, Esq., for the petitioner.

      Orris Bennett, Esq., and Hartford Allen, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies asserted by the respondent, for the fiscal years ended March 31, 1920 and 1921, in the amounts of $937.25 and $23,250.78, respectively. Four issues are set out in the original and amended petitions as follows: (1) Respondent failed to apportion the total tax liability, computed on the basis of the consolidated return, against the two affiliated corporations on the basis of the net income properly assignable to each; (2) reduction of consolidated invested capital by $250,000, representing the claimed value of two leaseholds acquired by one of the affiliated corporations in 1918, in exchange for capital stock; (3) failure to allow for 1921 a bad debt deduction of $42,426.76, representing the indebtedness of the Interstate Coal & Dock Co. to the Luhrig Collieries Co., affiliated with petitioner; and (4) addition to net income of 1920 of alleged unreported income of $10,000. At the hearing petitioner abandoned issues (2) and (3), and respondent conceded error as to issue (4), leaving only one issue for consideration by the Board.
    FINDINGS OP PACT.
    Petitioner, an Ohio corporation with its principal office at Columbus, and the Luhrig Collieries Co., filed, in July, 1921, a consolidated return for the fiscal year ended March 31,1921, showing a net income of $155,407.76, invested capital of $536,000, and a total tax liability of $43,733.17. Subsequently, on May 15, 1922, these two companies filed an amended consolidated return showing the same net income and invested capital, but a total tax liability of $43,783.17.
    Attached to the original consolidated return were schedules showing a detailed itemization of amounts reported as income and those taken as deductions on the face of the return, and balance sheets of the two affiliated companies as of March 31, 1920 and 1921. The items of income and the deductions of the two companies were not shown separately, but were combined and shown in total amounts. The items of income reported and the deductions taken, in the original and amended consolidated returns, are as follows:

      Gh'oss income

    Gross income from operations other than trading or manufac-
    turing-$608,676.18
    Taxable interest from all sources- 830. 69
    Rentals- 15,196. 72
    Royalties- 1,690. 59
    Gross income_ 626, 394.18

      Deductions

    Ordinary and necessary expenses — -$422, 563. 65
    Compensation of officers- 1, 200. 00
    Repairs_ 10, 046. 65
    Interest_ 2, 053. 37
    Taxes- 3, 988. 09
    Debts ascertained to be worthless and charged oil_ 3, 475. 50
    Exhaustion, wear and tear- 10,461.11
    Depletion_ 17,198. 05
    - 470,986.42
    Net income for taxable period. 155, 407.76
    The figures shown on the face of the original and amended consolidated returns comprised the following items of income and deductions of the separate companies:

    In a so-called 80-day letter addressed to the petitioner under date of November 7, 1924, showing an additional tax due for the fiscal year 1921, of $16,612.38, respondent computed the consolidated net income as follows:
    Net income as disclosed by consolidated return-$155,407.76 Additions:
    (a) Additions to reserves_ $824.26
    (b) Excessive depletion- 14, 837.88 - 15, 662.14
    Total_ 171,069.90 Deductions:
    (c) Depreciation_ 1,650.19
    Corrected consolidated net income_ 169,419. 71
    The item of $824.26 added to income as “ additions to reserves ” applies to the Luhrig Collieries Co. Of the $14,837.88 added to income, on account of excessive depletion, $407.33 applies to the petitioner, and $14,430.55 to the Luhrig Collieries Co. The deduction from income of $1,650.19, on- account of additional depreciation, applies to the petitioner.
    In the deficiency notice, showing a deficiency, for the fiscal year 1921 of $23,250.78, respondent determined the consolidated net income to he $178,712.80, computed as follows:
    Consolidated net income as disclosed- by office letter of November 7, 1924_$169,419.71 Addition:
    (a) Kehabilitation expense- 10,000.00
    Total_ 179,419.71

      Deduction:
    (b) Depreciation_ $706.91
    Corrected consolidated net income_ 178,712.80
    The addition to income of $10,000, rehabilitation expense, applies to the petitioner. The deduction from income of $706.91, additional depreciation, is the net result of the disallowance of depreciation of $1,659.66 previously allowed the petitioner, and the allowance of $2,366.57, to the Luhrig Collieries Co., for additional depreciation.
    The adjustments of income made by respondent in the 30-day letter of November 7, 1924, and in the deficiency notice for the fiscal year 1921 are not in dispute but are agreed to by the petitioner. The income, deductions, and net income or net loss, of the separate companies, for the fiscal year 1921, are as follows:

    The total tax shown on the original consolidated return was paid by the Luhrig Collieries Co., and the additional tax of $50 shown by the amended consolidated return was paid by check of the New York Coal Co., dated May 13, 1922. There- was no agreement between the petitioner and the Luhrig Collieries Co. as to the apportionment of the tax.
    In the deficiency notice, respondent has made no apportionment of the total tax for the fiscal year 1921, but has held petitioner to be entirely liable therefor and for the entire amount of the deficiency.
    The deficiency notice shows a consolidated net income of $11,372.46 for the fiscal year 1920, which respondent, at the hearing, conceded to be overstated by $10,000 through having erroneously included therein alleged unreported income in the amount of the overstatement. The correct consolidated net income for the fiscal year 1920 is $1,372.46.
   OPINION. .

Littleton:

Since the consolidated net income lor the fiscal year ended March 31,1920, is less than the credit allowed by section 236 (c) of the Revenue Act of 1918, for the purpose of computing the income tax, and less than the specific exemptions provided by sections 311 and 312, of the same Act, for the purpose of computing the excess and war-profits taxes, there is no liability for taxes for that year, and, therefore, no deficiency.

As to the assessment of the tax based upon a consolidated return, section 240 (b) of the Revenue Act of 1921 provides as follows:

In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each.

No agreement was ever had between the petitioner and the Luhrig Collieries Co. as to the apportionment of the tax to be assessed upon the basis of their consolidated return, nor did the petitioner agree to assume the tax liability of the Luhrig Collieries Co., and in the absence of such agreement, it is mandatory upon respondent to assess the tax upon the basis of the net income properly assignable to each. Petitioner suffered a net loss for the fiscal year 1921, all of the consolidated net income for' that year having been earned by the Luhrig Collieries Co., and under the provisions of the statute above quoted petitioner is not liable for any part of the tax based upon the consolidated return, and there can be no deficiency in its case. Respondent argues that the returns did not contain the data necessary to the determination of the net income of the separate companies, and that failure to submit such data was equivalent of notice of an agreement that the principal company was to be assessed,the entire tax. The answer to that is that it could not be regarded as notice of an agreement as to an apportionment of the tax any more than a notice that the tax was to be assessed upon the basis of the net income properly assignable to each of the affiliated corporations. It seems to us that a more logical view, in the absence of specific notice of an agreement for the apportionment of the tax, would be that there was no such agreement and that the tax was to be assessed upon the basis of the net income of the separate companies; especially so when respondent’s regulations require that there shall be attached to the return “ a schedule showing the proportionate amount of the total tax which it is agreed among them is to be assessed upon each affiliated corporation.” (See article 632, Regulations 62.) As we interpret the statute, it is incumbent upon the respondent to ascertain the proper parties against whom the tax is to be assessed, through inquiry, if necessary, as to any agreement or lack of agreement as to apportionment of the tax. If there be no such agreement the tax must be assessed upon the basis of the net income of the separate companies. In this proceeding, respondent has neither apportioned the tax in accordance with an agreement between the companies, for there was none, nor upon the basis of the net income properly assignable to each. This petitioner had no net income for 1921 and the Commissioner erred in determining and proposing to assess any deficiency against it.

Respondent argues that should the Board find that the tax should have been apportioned upon the basis of the net income assignable to each of the affiliated companies, it should, upon final redetermination, allocate the entire deficiency against the Luhrig Collieries Co. As to that proposition we have no jurisdiction, since the Luhrig Collieries Co. is not a party to these proceedings.

Reviewed by the Board.

Judgment will be entered for the petitioner on 15 days’ notice, u/nder Rule 50.

       Net loss.

       Net income.

       Net loss.

       Net income.