author: Aiiundell :

text:
    Mary Brent, Executrix, Estate of Edwin J. Brent, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8156.
    Promulgated February 18, 1927.
    1.. Community property. — Petitioner and wiie, residents of California, owned community property which they exchanged for stock of a corporation, the husband causing part of the stock to be issued to the wife as her separate property. Hold, the issuance of stock to the wife did not of itself effect a dissolution of the community so as to render the stock issued to the husband his separate property.
    2. Under the laws of California, upon the death of the husband, the wife takes her portion of the community estate as heir of the husband and the whole of the community estate is properly included in the gross estate of the husband for purposes of Federal estate tax.

      Ralph W. Smith, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in estate tax in the amount of $1,779.89. Two questions are presented for determination; first, whether certain corporate stock was at the time of the death of decedent his separate property or community property, and, second, if it was community property, whether the wife’s interest therein is subject to tax as a part of the estate of decedent. At the hearing the Commissioner amended his answer to allege that certain real estate and furniture, reported in the return filed as having been transferred to the wife of the decedent in 1910, should be considered as a part of the decedent’s estate and tax computed thereon.
    FINDINGS OF FACT.
    Edwin J. Brent died a resident of California on February 8, 1923, leaving a will in which he nominated as executrix his wife, Mary Brent, who is now the duly appointed, qualified, and acting executrix of the estate of the decedent.

      At the time of their marriage more than forty-five years ago the decedent and the petitioner possessed no property and neither of them, during the existence of the marriage, received any property by gift, bequest, devise, or descent, except certain assets given by the decedent to the petitioner as hereinafter set forth. For about thirty-five years they continuously resided together as husband and wife in the City of Los Angeles, Calif. At the time of establishing their residence in California they possessed no property. During the period of their residence in that State, Mary Brent worked and labored with her husband in the conduct and management of their store enterprises, and as a result of their mutual efforts the property represented in the estate of the decedent was accumulated.
    For many years prior to 1920 the decedent and the petitioner conducted a furniture business under the name of the Brent Furniture Co. In the year 1920 a corporation was formed, capitalized at $500,000, the capital stock of which was issued in exchange for the assets of the business theretofore conducted by the decedent and the petitioner. At the time of the issuance of the stock the decedent caused a certificate for 2,465 shares to be issued in the name of Mary Brent, the petitioner, representing one-half of the stock which remained after issuance of a few qualifying shares. Thereafter, the decedent, in the presence of his attorney, handed the certificate issued in the name of his wife to her, stating, in substance, that as she had helped earn all that they had, it was his desire that she have one-half of it. She deposited the certificate in her own safe deposit box and has since kept it there.
    The remaining half, 2,465 shares, of the stock of the company was issued to the decedent and was reported as a part of his estate in the estate-tax return filed.
    On April 2, 1910, the decedent transferred by deed to the petitioner, Mary Brent, the premises occupied by them as their residence, and on the same date made a gift to her of the furniture and furnishings in the residence. The real estate and the furniture and furnishings were reported in the estate-tax return filed under the schedule provided for transfers, at the values, respectively, of $65,000 and $15,000, but were not included as a part of the decedent’s taxable estate.
   OPINION.

Aiiundell :

The Commissioner does not contend that the property turned in to the newly organized corporation was not community property under the laws of California, or that the shares issued directly to Mary Brent were not her separate property. His position is that the issuance of stock to Mary Brent effected a dissolution of the community in so far as the stock is concerned, and that the stock retained by the decedent thereby became his separate property.

That the husband may relinquish in favor of his wife all claim to a portion of the community property, either' by contract, Perkins v. Sunset Co. (1909), 155 Cal. 712; 103 Pac. 190, 193, or by gift, Cullen v. Bisbee (1914), 168 Cal. 695; 144 Pac. 968, 969, seems to be well settled, and in either event so much of it as he releases becomes her separate property. But does such act of the husband of itself render the remainder of the property his separate property? Does it remove the remainder of the property from the operation of the presumption that all property in the possession of either spouse during marriage is community property? The change by agreement of the spouses of a part of the community property to the separate property of one of them, or by the gift of a part of it by the husband to the wife, affects, as we see it, only the part transferred and the character of the remainder is not thereby changed. In Ives v. Connacher (1912), 162 Cal. 174; 121 Pac. 394, 395, the rule stated in Ballinger on Community Property is quoted with approval, as follows:

The root or property source, together with the time when acquired, are alone looked to as the criterion to determine what property is or is not common. * * * Property once impressed with the community character retains that impress during the existence of the community, unless alienated or exchanged.

The position taken by the Commissioner in this case amount? to saying that a husband by releasing to the wife a part of the community property, without any action on her part, can change the remainder of the property from community to his separate property. While the spouses may remove common property held by them from the operation of the community laws (secs. 158 and 159, Civil Code), an agreement between them is necessary to effect such a change. Stating it in another way, although the husband may alienate the community property, yet, during the time it is held by the community, it retains its character as community property unless there be a concert of action between the spouses to change it from community to separate property.

In the case before us, there is no evidence of any act on the part of either husband or wife to show that they intended the stock retained by the husband to become his separate property, and we are of the opinion that its community character was not changed by the issuance of a part of the Brent Furniture Co. stock to the wife.

We are thus brought squarely to the question of whether the wife’s interest in the community property under the laws of California constitutes a part of the estate of the husband and as such is subject to the estate tax imposed by the Revenue Act of 1921. The petitioner relies on Wardell v. Blum, 276 Fed. 226, and contends that such decision is binding on the Board.

The Commissioner' is seeking to tax as a part of the husband’s estate that part of the community property which, upon the death of the husband, passed to the wife. The pertinent provisions of the Revenue Act of 1921 are sections 401 and 402, which sections, in so far as they are material, read as follows:

Sec. 401. That, In lieu of the tax imposed by Title IV of the Revenue Act of 3918, a tax equal to the sum of the following percentages of the value of the net estate * * * is hereby imposed upon the transfer of the net estate of every decedent dying after the passage of this Act, whether a resident or nonresident of the United States * * *.
Sec. 402. That the value of the gross estate of the decedent shall be determined by including the value of the time of his death of all property, real or personal, tangible or intangible, wherever situated — ■
(a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate;
(b) To the extent of any interest therein of the surviving spouse, existing at the time of the decedent’s death as dower, curtesy, or by virtue of a statute creating an estate in lieu of dower or curtesy * * *.

Is the wife’s interest in the community property such that, within the meaning of the above quoted sections, there is no taxable transfer of it when it passes to her upon the death of the husband, and is that interest such that it is not included in the gross estate of the husband?

From the time of the laws passed by the first legislature (Stats. 1850, p. 254) the statutes of California have at all times defined community property, have provided that the husband shall have the management and control of such property, and have provided for its distribution upon the death of either spouse. From time to time amendments were added, but under all of the community property laws the state courts have held that during the continuance of the marriage relation the wife has not a present vested interest therein. Van Maren v. Johnson, 15 Cal. 308; Packard v. Arellanes, 17 Cal. 525; In re Burdick’s Estate, 112 Cal. 387; 44 Pac. 734; Spreckels v. Spreckels, 172 Cal. 755; 158 Pac. 537; Stewart v. Stewart, 199 Cal. 318; 249 Pac. 197. At least such is the law as we find it up to and including the period here under consideration. There have been some differences in the expressions of the courts as to the wife’s interest, but the prevailing view and that followed by the latest decisions is that the wife has no vested interest during the existence of the marital community even though her interest. may be a more definite and present one than is that of an ordinary heir. See Roberts v. Wehmeyer, 191 Cal. 601; 218 Pac. 22, cited in United States v. Robbins, 269 U. S. 315; and Stewart v. Stewart, 249 Pac. 197, decided September 2, 1926.

The state statute with which we are concerned is section 1402 of the Civil Code, which, at the time of the death of the decedent whose estate is involved in this case, provided:

Upon tie death of the husband, one-half of the community property goes to the surviving wife, and the other half is subject to the testamentary disposition of the husband, and in the absence of such disposition, goes to his descendants, equally, if such descendants are in the same degree of kindred to the decedent; otherwise, according to the right of representation; and in the absence of both such disposition and such descendants, is subject to distribution in the same manner as the separate property of the husband. In case of the dissolution of the community by the death of the husband, the entire community property is equally subject to his debts, the family allowance, and the charges and expenses of administration.

We come now to the case of Wardell v. Blum, 276 Fed. 226, upon which the petitioner relies, which holds that in the case of a California marital community, upon the prior death of the husband only one-half of the community property is subject to the Federal estate tax. The court in reaching its decision relied on the state inheritance tax statute of 1917 and on the decision in Arnett v. Reade, 220 U. S. 311, as establishing the interest of the wife in community property.

At the first opportunity offered, the Supreme Court of California in Roberts v. Wehmeyer, 191 Cal. 601; 218 Pac. 22, stated that it agreed with Wardell v. Blum in its holding that the wife’s one-half of the community property is not subject to the State inheritance tax, but held further that—

In so far as it relies on Arnett v. Reade, supra, as indicating that a wife has at all times had an interest or estate in the community property, we are constrained to disagree with it.

And the Supreme Court of the United States in United States v. Robbins, 269 U. S. 315, cites Roberts v. Wehmeyer, supra, and points out that that case holds that Arnett v. Reade, supra, would not be followed in California.

The 1917 state inheritance tax act which was considered in Wardell v. Blum, supra, provides in part—

That for the purpose of this act the one-half of the community property which goes to the surviving wife on the death of the husband * * * shall not be deemed to pass to her as heir to her husband, but shall, for the purpose of this act, be deemed to go, pass, or be transferred to her for valuable and adequate consideration, and her said one-half of the community shall not he subject to the provisions of this act.

In the recent case of Stewart v. Stewart, 249 Pac. 197, decided September 2, 1926, the Supreme Court of California carefully considered this statute in relation to the general question of community property and commented thereon as follows :

It is to be observed that the foregoing proviso is by its terms expressly limited to “ the purposes of this act,” thus clearly indicating by exclusion that it was not the purpose of the Legislature of 1917 to change the otherwise general and long-established rule of property except in its application to the particular and limited purposes of said inheritance tax law. This is made plain when we come to consider the further legislative enactments adopted of even date with the foregoing act in the form of certain amendments to the several sections of the Civil Code relating to community property.

The Stewart case also considered the decision in Roberts v. Wehmeyer, supra, and approved it in the following language:

It is, however, pertinent to the present discussion in so far as it [Roberts v. Wehmeyer'] considers, and we think correctly disposes of the cases of Blum v. Warden (D. C.) 270 F. 309, and (C. C. A.) 276 F. 226, so much reiterated and relied upon by the respondent herein, and also considers and disposes of the case of Arnett v. Reade, 220 U. S. 311, 31 S. Ct. 425, 55 L. Ed. 477, 36 L. R. A. (N. S.) 1040, to the satisfaction of this court.

It should be borne in mind that the Stewart case involved community property acquired in 1918 and it therefore became necessary for it to consider as well the amendments of 1917, designated as sections 172 and 172a of the Code, which the wife contended served to give her a present vested interest in the community property. The court, in disposing of this contention, said:

The Legislature in framing these two amendments which, taken together, worked a revision of the former section 172 of the Civil Code did not state therein “ in plain language,” as it was pointed out in the second Sprcclcels case it might easily have done, “ that the purpose of these amendments was to vest in the wife during the marriage a present interest or estate in the community property.” The Legislature did not even by said amendments to the Civil Code go as far as it had done in its revision of the inheritance tax law, coincidently adopted, so as to state that:
The “ one-half of the community property which goes to the surviving wife on the death of the husband * * * shall not be deemed to pass to her as heir of her husband but shall * * * be deemed to go, pass, or be transferred to her for valuable and adequate consideration.”
Had the Legislature seen fit to so declare in the language employed by it in the coincident statute, no doubt could have existed as to its intent to work sueh a radical change in the former and long-established status as to render the interest of the wife in the community property thereafter to be acquired a present vested estate and interest therein from the date of its acquisition. The Legislature did not do this nor anything like it. All that the Legislature by these amendments did do, or attempt to do, was to cast about the interest of the wife in both the real and personal property of the community during the continued existence of the marriage relation added safeguards and protection against the fraudulent or inconsiderate acts of the husband in the exercise of his control and dominion over these properties of the nature of those already provided for in earlier statutes and especially in and by the 1891 amendment to section 172 of the Civil Code.

In view of what we conceive to be the unequivocal language of the Supreme Court of California, as well as the language of the Supreme Court of the United States in the Bobbins case, we feel constrained to disagree with the Circuit Court of Appeals in the case of Wardell v. Blum, supra, and are of the opinion that the interest of the wife in the property of the community during the continuance of the marriage relation is not a present vested interest therein, even though it be a “ more definite and present interest than is that of an ordinary heir.” Stewart v. Stewart, supra.

In the case of In re Burdick’s Estate, supra, it was held that upon the death of the husband the entire community estate was subjected to administration as the estate of the husband, the court saying in part:

If it Rad not been intended that the entire community properly should be administered as estate of the husband, so important a matter could not be overlooked. * * * This plain intent that the title of the wife to one-half of the community property shall be administered as part of the estate of the husband, added to the continuous and uniform practice of near half a century, must place this matter beyond all doubt.

It was urged in that case that the wife took her share of the community not by succession but as a survivor. The court, after considering at some length various provisions of the Civil Code, referred to section 1274 and said:

This is an express legislative declaration that .the disposition of the community property made in sections 1401 and 1402 is succession.

Earlier in the case, speaking of the moiety which the wife takes under section 1402, the court holds that “ it ‘ goes ’ to her just as it ‘goes ’ to the descendants.”

In the later case of In re Moffitt’s Estate (1908), 153 Cal. 359; 95 Pac. 653, an attempt was made to have the court overrule .the Burdick case and others along the same line to the extent of declaring that upon the death of the husband the widow takes “not as his heir, and not by succession, but by a certain right of survivor-ship.” The court, however, reaffirmed its former decisions in the following language:

After painstaking investigation and review, and after the fullest deliberation, this court in Re Bur&ieh determined and held, as it declared in BpreeMes v. BpreeMes, that upon the death of the husband the wife takes one-half of the community property as heir. Every argument here advanced against that conclusion was urged by learned counsel in the other cases, and was fully met in the opinions above referred to.

It would sean from these decisions that upon the death of the husband the entire community estate should be included as a part of hjs gross estate as being “ subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate.” (Section 402, Revenue Act of 1921.) It also follows from these decisions that, as the wife takes her portion by succession and not by right of survivorship, there is a “transfer,” within the meaning of section 402 of the Revenue Act of 1921, of the part of the community estate which she takes and that such part is subject to the Federal estate tax.

The views we announce here are supported by the recent case of Frazer v. United States, decided July 26, 1926 (U. S. Dist. Ct., E. D. Mich., S. T>., not yet officially reported). This was a suit to recover an estate tax paid under the Revenue Act of 1917 on the one-half of the community real estate located in California which upon the death of the husband passed to the wife. The material part of the decision is as follows:

Whether the contention of the plaintiffs or that of th.e defendant, as just stated, is correct, is the decisive question presented in this case. That question has, since the commencement of this suit, been decided by the United States Supreme Court in the case of United States v. Robbins, 269 U. S. 315. In that case the court held that, according to the law of California, as construed by its courts, whose decisions in that respect it held that it was its duty to follow, during marriage and while the husband is living, his wife has “ a mere expectancy ” in community property and the husband alone has the power of disposition of such property. That decision is controlling here * * *.
The contention of plaintiffs that the rights of the wife of the deceased in this connection were enlarged by the California Inheritance Act of 1917 is disposed of adversely to plaintiffs by the observation that such statute refers and applies only to the state inheritance tax and not to the federal estate tax here involved.

In 1923 the Legislature of California passed certain amendments affecting community property, but as these amendments were approved and became effective at a date subsequent to the date of the acquisition of the property and also subsequent to the date of the decedent’s death, they have not been considered here.

At the hearing of this case the Commissioner amended his answer to the petition so as to allege that the property which ivas reported in the return filed as having been transferred by the decedent to his wife on April 2, 1910, should be included as a part of the decedent’s estate and subject to tax. The Commissioner offered no proof to substantiate this allegation and it must accordingly be denied. Appeal of General Lead Batteries Co., 2 B. T. A. 392.

Judgment will be entered on 15 days'1 notiee, under Rule 50.


source: Caselaw Access Project

author: Trammell:

license: Public Domain

text:
    Minnesota Cement Construction Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6284.
    Promulgated February 18, 1927.

      Benjamin E. Flesher, Esq., for the petitioner.

      F. 0. Graves, Esq., for the respondent.
   Trammell:

This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1919. The deficiency asserted is $58.27 and arises on account of the action of the respondent in disallowing as a deduction the amount claimed by the petitioner as depreciation on its building.

findings of fact.

The petitioner is a Minnesota corporation, with its principal office in Minneapolis. In the fall of 1916 it began the erection of buildings which were completed during the following winter at a total cost of $5,930.80, to which an addition was made in 1919 which cost $1,000.

These buildings were used by the petitioner in its business. They were constructed of cement staves and blocks, were of flimsy construction and were not reinforced by steel. They had a thin wall construction, were erected on boggy or marshy ground and vibrated when heavy trucks went by. The extreme cold on the outside and the heat from the inside caused considerable damage to the buildings. The heat on the inside was necessary on account of the use of steam during the winter in the manufacturing business. During the summer this condition did not exist. In 1926 the walls showed very great deterioration and one whole side was in very bad condition. The whole roof of the factory building has been replaced, which replacement was made necessary by reason of the clouds of steam that came out of the curing kilns when they were opened to take cars out. The staves on the outside are falling to pieces.

The petitioner in his return claimed a deduction on account of the depreciation of said buildings at the rate of 10 per cent. The respondent disallowed this deduction and determined that the rate of depreciation should have been 2 per cent. The life of the building is 10 years and the proper rate of depreciation is 10 per cent.

Judgment will be entered for the petitioner.


author: Phillips:

text:
    Frederick Ayer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8184.
    Promulgated February 18, 1927.
    1. Tie original cost of stock is not necessarily the basis for determining profit or loss upon a-sale.
    2. Where the Commissioner determined that the original cost of stock had been reduced by the exercise of stockholder’s rights to subscribe to additional stock, which rights arose out of the ownership of such original stock, held, that petitioner has not established the computation to be incorrect by showing only the original cost of the stock. Miles v. Safe Deposit & Trust Go., 259 U. S. 247.

      Jamies Graig Peaeoelc, Esq., for the petitioner.

      A. H. Fast, Esq., and Julian Gibbs, Esq., for the respondent.
    The petitioner seeks a redetermination of a deficiency in income taxes for 1920 in the amount of $22,372.66 as determined by the Commissioner. The petitioner alleges that the Commissioner committed error in failing to determine that a loss was sustained on the sale of 800 shares of stock of the First National Bank of Boston.
    FINDINGS OF FACT.
    Prior to January 1, 1920, the petitioner had acquired by purchase in the open market, or by the exercise of subscription rights, 300 shares of the capital stock of the First National Bank of Boston, at a cost to him of $120,637.50. The ownership of these shares was evidenced by eight certificates of stock. On December 6, 1920, he sold 300 shares of the capital stock of the First National Bank of Boston for $85,500 and upon such sale delwered the eight certificates of stock referred to above. Upon such sale the petitioner paid stamp taxes of $12.
    The Commissioner determined that in 1920 the bank offered to its stockholders one new share at $100 for each share then hold, and further determined that the petitioner exercised his right and purchased, in April, 1920, 300 shares of the capital stock of the First . National Bank of Boston for $30,000. He determined the cost of the stock of the petitioner as follows:
    Cost of original 300 sbares_$120, 637. 50
    Cost of 300 additional sbares_ 30, 000. 00
    Cost of 600 sbares_ 150, 637. 50
    Upon this basis the Commissioner determined the cost to the petitioner of the 300 shares sold to be $75,318.75 and computed the deficiency accordingly.
   OPINION.

Phillips:

Upon the hearing counsel for the parties submitted in evidence the Bureau letter setting out the basis for the computation of the deficiency. The petitioner proved the sales price, the numbers of the certificates delivered, and the original cost of 300 shares evidenced by the certificates of stock which were delivered upon the sale and rested. The Commissioner then called to the stand the two witnesses who had testified on behalf of the petitioner and also counsel for the petitioner. Their testimony was to the effect that they did not know whether or not any rights to subscribe for stock had been issued in 1920 by the First National Bank of Boston to its stockholders, or whether petitioner had acquired any stock in 1920 by reason of the exercise of any such rights. Upon this record the deficiency determined by the Commissioner must be approved.

The original cost of stock is not necessarily the basis for determining profit and loss. This cost may be increased by the payment of assessments or decreased by liquidating dividends, stock dividends, or the exercise of rights to subscribe to stock, which rights the Supreme Court, in Miles v. Safe Deposit & Trust Co., 259 U. S. 247; 42 Sup. Ct. 483; 3 Am. Fed. Tax Rep. 3168, held to be essentially analagous to a stock dividend.

There was no dispute between the Commissioner and the petitioner as to the originál cost of the stock acquired before 1920 or as to the selling price of the stock sold. The sole issue was whether the original cost was decreased by the exercise of stock rights in 1920. The Commissioner having found that there was such an exercise of stock rights and the petitioner having failed to submit any evidence upon the sole question in dispute, the petitioner has failed to establish a cost basis other than that determined by the Commissioner.

Decision will be entered for the Oonvmissioner.


text:
    Appeals of The Maltine Company.
    Docket Nos. 2805, 3967.
    Promulgated February 18, 1927.
    Transaction involved herein held to be a purchase by the petitioner of the assets of its predecessor for its capital stock.

      Wtn. R. Gonklin, Ésq., and Louis O. Van Doren, Esq., for the petitioner.

      Henry Ravenel, Esq., for the Commissioner.
    The petitioner appeals from the determination by the Commissioner of deficiencies in income and profits taxes for 191T, 1918, and 1919 of $9,517.98, $9,630, and $7,217.34, respectively. It alleges that the Commissioner erred in the determination of its invested capital.
    FINDINGS OF FACT.
    The petitioner is a New York Corporation, organized in January, 1898, with an authorized capital stock of $1,000,000, divided into 10,000 shares of the par value of $100 each, and having its principal office in Brooklyn. The only statement in the certificate of incorporation with reference to the purpose and powers of the corporation is as follows:
    The purposes for which it is to be formed are, the making and selling medicinal and food products.
    For many years prior to 1898, The Maltine Manufacturing Co., a New York corporation, was engaged in manufacturing and marketing a medicinal preparation known as Maltine. In 1898 its capital stock was $100,000, all of which was held by four stockholders as follows:
    Shares.
    Timothy L. Woodruff_ 310
    Lucius H. Biglow- 385
    Rodney A. Ward_ 230
    Phineas O. Lounsbury_ 75
    For many years prior to 1898 the earnings of the company had exceeded $100,000 annually and it had paid annual dividends of 100 percentum of the par value of its stock. The value of the stock in January, 1898, was in excess of $1,000,000, represented largely by intangible assets.
    At a meeting of the board of directors of The Maltine Manufacturing Co. held January 8, 1898, the following resolution was adopted:
    Whereas, on the 8th day of January, 1898, the stockholders of this Company by unanimous vote made the following resolution:
    “ Whereas, The Maltine Company, a corporation duly organized under the laws of. the State of New York, has proposed to purchase and take over all of the property, both real and personal, assets, business and good-will of this Company, and in consideration therefor to issue and deliver to the stockholders of this company its total capital stock, amounting to One Million Dollars; and
    “Whereas, it is deemed advisable to accept said proposition:
    “ Therefore Be It Resolved, That the Directors of this Company be and they hereby are authorized and directed to make the following agreement:
    * * * * * * *
    “And Be It Further Resolved, That said Directors be and they hereby are authorized and directed to do and perform all necessary acts and to make, execute and deliver all necessary papers to carry said agreement into full force and effect.”

      Therefore Be It Resolved, Tliat tlie President and Secretary of this Company be and they hereby are authorized and directed to make, execute and deliver the aforementioned agreement and to do and perform all necessary acts and to make, execute and deliver the necessary papers to carry the same into full force and effect.
    The contract recited in this resolution was thereafter executed by The Maltine Manufacturing Co. and The Maltine Co. In so far as material it reads as follows:
    This Agreement, made the 8th day of January, 1898, between The Maltine Manufacturing Company, party of the first part, and The Maltine Company, party of the second part
    *******
    Whereas, the party of the second part is desirous of acquiring all of the property, both real and personal, and the assets, business and good-will of the party of the first part;
    Now, Therefore, This Indenture Witnesseth: That it is mutually agreed by and between the said party of the first part and the party of the second part, as follows:
    1. The said party of the first part doth agree to convey, sell, assign, transfer, and set over unto the party of the second part all of the property of the party of the first part, both real and personal, wheresoever the same may be situate, whether held by or in the name of the said party of the first part, or in trust therefor, and the business and good-will thereof, including all and singular the lands, tenements, hereditaments and appurtenances, goods, chattels, stocks, promissory notes, debts, choses in action, evidences of title, claims, demands and effects of every description belonging to said party of the first part, wheresoever the same may be situate.
    2. In consideration thereof, the party of the second part agrees to issue all of its capital stock, amounting to one million dollars ($1,000,000) to the stockholders of the party of the first part, according to their respective interests in, or holdings of, the capital stock of the party of the first part; that is to say, to Timothy L. Woodruff, thirty-one hundred shares; to Lucius H. Biglow, thirty-eight hundred and fifty shares; to Rodney A. Ward, twenty-three hundred shares, and to Phineas C. Lounsbury, seven hundred and fifty shares; said stock to be issued and delivered fully paid and non-assessable, to the said stockholders of the party of the first part.
    3. The party of the second part further agrees to assume all of the debts, liabilities and obligations of the party of the first part.
    4. It is mutually agreed that the aforementioned delivery of the property, etc., of the party of the first part to the party of the second part, and the issue and delivery of the capital stock of the party of the second part to the stockholders of the party of the first part, shall take place on the 8th day of January, 1898 * * *.
    On January 8, 1898, the petitioner issued all of its stock to the subscribers named in the certificate of incorporation, as follows:
    Shares.
    Timothy L. Woodruff_3,334
    Lucius H. Biglow_3, 333
    Rodney A. Ward_3, 333

      On the same date, Timothy L. Woodruff and Rodney A. Ward surrendered the original certificates issued to them, respectively, and other certificates were issued by the petitioner as follows:
    , • Shares.
    Timothy L. Woodruff_3,100
    Lucius H. Biglow_ 517
    Rodney A. Ward_2, 300
    Pirineas O. Lounsbury_ 750
    The petitioner’s stock was held after this transfer on January 8, 1898, as follows:
    Shares.
    Timothy L. Woodruff-3,100
    Lucius H. Biglow-3, 850
    Rodney A. Ward-2, 300
    Phineas C. Lounsbury_ 750
    After a search of something over a year, the certificates of stock in The Maltine Manufacturing Co. outstanding as of January 8, 1898, were found in 1925 in the safe of the petitioner endorsed in blank and marked “ cancelled.”
    On January 8, 1898, a deed of its real estate to the petitioner was executed and acknowledged by The Maltine Manufacturing Co. This deed was recorded May 8, 1900.
    The petitioner took possession of the factory, equipment, and other assets of The Maltine Manufacturing Co. Thereafter, the products formerly made by The Maltine Manufacturing Co. and other new products were manufactured and sold by the petitioner under the label of The Maltine Manufacturing Co.
    No steps were taken to dissolve The Maltine Manufacturing Co. after the transfer of January 8, 1898.
    The petitioner in its income and profits-tax returns for 1917 and 1918, 1919, 1920, and 1921, made the following statement with reference to its invested capital:
    This Company issued $1,000,000 capital stock for $1,000,000 in trademarks and $134,926.34 net of tangible property.
    The Commissioner determined that the petitioner acquired the assets, tangible and intangible, of The Maltine Manufacturing Co. in exchange for its stock and permitted the value of the good will to be included in invested capital subject to the limitations upon intangible assets.
    In computing invested capital for 1918 the Commissioner deducted from earned surplus existing at the beginning of the year the amount of $21,000.53, representing income and profits taxes for 1917. The amount so deducted was computed by prorating the entire tax for 1917 from the date when it became due and payable. In a similar manner $18,651.03, a prorated portion of the income and profits tax for 1918, was deducted in computing invested capital for 1919.
   OPINION.

Phillips:

It is the contention of the petitioner that it issued its capital stock for the capital stock of its predecessor, The Maltine Manufacturing Co., that such stock-had a value of over one million dollars, and that under the decision of this Board in Appeal of Regal Shoe Co., 1 B. T. A. 896, it is entitled to include this full amount in its invested capital. The Commissioner contends that the petitioner purchased the assets of its predecessor, which were largely intangible and can be included in invested capital only in a limited amount.

The contract entered into between the two companies plainly contemplates a purchase by the petitioner of the assets of its predecessor. There is nothing in the evidence which would lead us to believe that this contract was not carried out in accordance with its terms. Although the petitioner insists that the stockholders of the predecessor corporation surrendered their stock to the petitioner and in exchange received its stock, the only evidence which would lend any support to this theory is that the certificates of the predecessor company were, in 1925, found in the safe of the petitioner marked “ cancelled.” But even here we find that the only two endorsements which bear any date purport to have been executed January 31, 1898, some three weeks after the date when certificates of the petitioner were issued.

Petitioner lays stress upon the failure to find any bill of sale of the personal property of its predecessor. There is no question, however, that the petitioner went into possession and control of these assets, and under such circumstances a bill of sale is unnecessary. A deed of the real estate of the predecessor corporation was executed and acknowledged by its officers on the same date that the certificates of stock were issued to the stockholders of the predecessor corporation and, although this deed waa not recorded for some two years, this fact can not lend support to the petitioner’s theory that the stock of the predecessor corporation was first acquired by the petitioner and the assets transferred thereafter.

The entire transaction appears to have been carried through on one date, January 8, 1898. On that date the stockholders and directors of the predecessor corporation each held a meeting and authorized the sale of the assets in exchange for the total capital stock of the petitioner to be issued to the stockholders of such predecessor corporation, the agreement between the parties was executed and acknowledged, the deed was executed and acknowledged, and the certificates of stock of the petitioner were executed and delivered. There is nothing in the record which would lead us to believe that on this same date and before the delivery of the stock certificates the parties changed the transaction into one for the purchase of the stock of the predecessor corporation, rather than its assets. Such evidence as we have leads to a contrary conclusion and the determination oi. the Commissioner must be approved.

The adjustment of invested capital by prorating the amount of the income and profits taxes for prior years is in accordance with the provisions of the ítevenué Act of 1926. Russel Wheel & Foundry Co., 3 B. T. A. 1168.

The deficiencies are redetermined to he the amounts determined by the Commissioner. Decisions will be entered accordingly.


author: Littleton:

text:
    Corn Exchange Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7067.
    Promulgated February 18, 1927.
    Petitioner purchased bonds and securities of other corporations for resale and as investments. Through the use of recognized tables prepared for the purpose of determining the annual amortization of the discounts or premium on such bonds, petitioner determined the annual amount which, over the period between the-date of purchase and the date of maturity, would amortize the difference between the purchase price and the face value of the bonds held. In the case of bonds purchased at a discount income was increased and in the case of bonds purchased at a premium loss was taken each year, and this increase in income or loss was reflected upon the books and in the income-tax returns filed for each year. Helé, that the amounts by which such bonds were written up or down in each year did not represent accrued income or a loss sustained within the year and it may not therefore be said that such method of accounting clearly reflected income.

      Bpotswood D. Bowers, Esg., for-the petitioner.

      Thos. P. Dudley, Jr., Esg., for the respondent.
    The Commissioner determined a deficiency in income and profits tax in the amount of $25,951.65 for the year 1921. Only that portion of the deficiency arising from the elimination by the Commissioner of certain adjustments made by petitioner in its income accounts for the amortization of premiums and discounts on bonds of other corporations purchased by it is in dispute.
    FINDINGS OF FACT.
    Petitioner is a banking corporation organized about 1852 under the laws of the State of New York with principal office in New York. For many years it has followed the practice of investing-large amounts in bonds of other corporations. In 1914 petitioner adopted a practice as a part oí its bookkeeping system, which has always been maintained upon the accrual basis, of amortizing the discount or premium on bonds purchased by it. Through the use of tables, prepared for that purpose, petitioner determined at the end of each interest period the amount which, over the period between the date of purchase of a bond and its maturity, would amortize th'e difference between the purchase price and the face value of the bond. In the case of bonds purchased at a discount petitioner wrote up the accounts for such bonds in the amount so determined and credited a corresponding amount to income for the year. Conversely, in the case of bonds purchased at a premium, the bond accounts were written down at each interest period and income correspondingly decreased. These credits to and charges against income for the current year’s amortization were reflected in petitioner’s interest account as additions or subtractions from the amount of interest received or accrued upon the books. As a result, .the books showed the cost of the various bonds as adjusted for discounts or premiums previously amortized. When bonds were sold before maturity, as was the case in many instances, or redeemed at maturity, the basis adopted by the petitioner in computing the gain or loss in the year of sale was not the actual cost but the cost as adjusted in the manner indicated. Usually when bonds had been purchased, at a discount and written up, and were sold before maturity for an amount less than book value, the difference between the sales price and the book value represented the loss claimed, as disclosed by entries appearing upon petitioner’s books of account relating to certain Western Maryland R. R. Co. 4 per cent Gold Bonds due October 1, 1952:

    Petitioner’s accounting method relating to bonds purchased at a premium as disclosed by a transcript of its account relating to certain Genessee Railroad Co. 6 per cent Gold Bonds due July, 1957, was as follows:

    Petitioner’s treatment of bonds purchased at a premium and not sold before maturity, as disclosed by a transcript of its account relating to certain New York, Lackawanna & Western R. R. 6 per cent gold bonds due January 1, 1921, follows:
    Acquired. 1915. Itedcomod, 1921. Par Cost. Amortization deducted from book value and from income. Date. Amount. Adjusted book value. Sales price. Gain or loss. $22,000 22,000 $23,677.50 1915 1916 1917 1918 1919 1920 $133.32 282.45 295.06 308.24 322.02 336.41 1,677.60 $23,644.18 23,261.73 22,966.67 22,658.43 22,336.41 22,000.00 22,000.00
    In his determination the Commissioner eliminated entirely all adjustments for amortization of premium or discount, the effect of which was twofold; first, he eliminated the amortization taken for the current year and thereby decreased the income as reported by petitioner in the amount of $12,312.82, and, secondly, he employed as his basis for computing the gain or loss on sales the actual cost of the bonds without regard to the amount of discount or premium previously amortized, charged or credited to the bond account, as the case may be, thereby decreasing the losses on sales as claimed by petitioner in the amount of $34,261.01.
   OPINION.

Littleton:

There is no dispute as to the facts or the figures. Petitioner claims that it is entitled under the provisions of subsection (b) of section 212 of the Revenue Act of 1921 to have its net income computed in accordance with the method of accounting regularly employed in keeping its books and that its income for' any year from bonds held by it must be increased or decreased as the case may be in the amount of the amortization of the discount or premium at which such bonds were purchased; that in allowing the gain or loss from the sale of such bonds the basis to be employed is the cost as increased or decreased by amortization of the discount or 'premium previously entered upon the books.

The Commissioner takes the position that the method employed by the petitioner in determining its income and losses on bonds owned by it does not clearly reflect its income and is not in accordance with the tests of the statute for the determination of income losses.

In New York Life Insurance Co. v. Edwards, 271 U. S. 109, the court said:

The Company owned many bonds, etc., payable at future dates, purchased at prices above their par values, and to amortize these premiums a fund was set up. It claimed that an addition to this fund should be deducted from gross receipts. The District Court thought the claim well founded, tout the Circuit Court of Appeals took another view. Unless the addition amounted to a loss “ actually sustained within the year ” no deduction could be made therefor. Obviously, no actual ascertainable loss had occurred. All of the securities might have been sold thereafter above cost. The result of the venture could not be known until they were either sold or paid off.

The petitioner undertakes to distinguish the decision of the court in New York Life Insurance Co. v. Edwards, supra, from this proceeding upon the ground that returns of income under the Revenue Act of 1913, which was involved in the case cited, were required to be made on the basis of cash received and disbursed, whereas the. petitioner’s return for the year 1921 was made upon the accrual basis. We think, however, that no accrual can be predicated on the • premium or discount at which a bond is purchased before the bond is sold or redeemed. Before sale or redemption of a bond nothing occurs to fix the amount which the holder thereof will actually realize from it (eliminating from consideration the matter of interest which is not in dispute here). The discount on the bond purchased below par is unlike interest, which is a fixed charge and accrues periodically. The right to receive this discount, or difference between the cost of the bond and its par, can not be determined in advance as the bond may be sold for more or less than its cost, or, perhaps, as in the case of many bonds, it may be redeemed prior to its maturity at an amount different from its principal or face amount of the bond. This discount is not earned or accrued in annual installments and can not be income to the holder of the bond, either as additional interest or as a separate item of income. If anything, the annual amortization of this discount represents merely a theoretical appreciation in value unrealized by a sale or other disposition oí the bond. It does not even represént actual appreciation as the current market price for the bond may be above Or below the cost thereof as adjusted for previous amortization of the discount.

The amount by which the petitioner has annually written up its bonds and correspondingly increased income on account of the amortization of discount thereon can not represent income received or accrued to the petitioner under the definition of income as laid down by the courts in many cases.' The converse is true in respect to the amortization of premium on bonds bought above par. The interest received 'from such bonds is not, in fact, diminished by annual charges made for the purpose of amortizing this premium. The fact that the petitioner may consider a part of this interest as set aside annually for the purpose of amortizing the premium does not diminish the actual interest received or accrued on the bonds. Nor does the setting aside of an annual amount for this purpose constitute a realized loss on the bonds as the court has pointed out in New York Life Insurance Co. v. Edwards, supra.

The same consideration governs in determining the proper basis to be employed in computing gain or loss on the sale of the bonds under the 1921 Act as under the 1913 Act. The basis prescribed by the statute for computing gain or loss is cost. (The March 1, 1913, value is not involved in this proceeding.) This basis can not be changed because of any supposed appreciation or diminution in value not previously allowed. Unlike depreciation, the annual amortization of premium or discount on securities of other corporations held for investment is not an allowable adjustment to income, nor an allowable adjustment to the basis for computing gain or loss on sale. See Appeal of Even Realty Co., 1 B. T. A. 355.

The petitioner insists that because it has adhered to a certain method of keeping its accounts over a number of years, its income must be computed solely in accordance with that method of accounting. Bookkeeping entries are significant only as evidence or records of transactions and the legal effect of such transactions and the method employed in keeping the books must be determined from the transactions themselves, and not merely from the book entries affecting them. See Appeal of Chatham & Phenix National Bank, 1 B. T. A. 460. Moreover, section 212 (b) of the Revenue Act of 1921, upon which the petitioner relies in support of this contention, provides that a taxpayer’s method of accounting shall be followed only if such method clearly reflects income. The effect of this section is to permit a taxpayer to adopt any recognized or logical method of accounting, but requires that the method so adopted clearly reflect income. See Appeal of Owen-Ames-Kimball Co., 5 B. T. A. 921. A method of accounting which reflects purely theoretical increases or decreases in income not realized, as we believe tbe method contended for by petitioner does, can not correctly reflect income as contemplated by the statute. Section 212 does not contemplate that such a method of accounting shall itself be conclusive as to the true income of a taxpayer.

It is also contended by the petitioner that the net result of its method of accounting is the same as that used by the Commissioner when considered over a period of years; in other words, that it reports the same gain or loss on bonds, which the Commissioner contends is realized only upon the sale or retirement of the bonds, but that it reports this amount in annual installments. We think it is not enough however that a particular method of accounting be correct only when its effect over a period of years is considered. The income and profits tax is levied with respect to annual periods and each such period stands by itself. The statute requires that the income for each year be correctly determined and the tax imposed thereon. The erroneous computation of income for some prior years or subsequent years does not justify an erroneous computation of income for the year under consideration. Appeal of MacMillan Co., 4 B. T. A. 251.

Judgment will be entered for the respondent.


author: Arundell:

text:
    James McDonald, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6140.
    Promulgated February 18, 1927.
    Petitioner held not subject to tax on annuities received under a will where tbe courts in construing tbe will direct that such annuities shall be a charge against the corpus of the estate.

      Ferdinand Tannenbavm, Esq., for the petitioner.

      Ellis W. Manning, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income tax for the calendar years 1918 and 1919 in the respective amounts of $197.06 and $239.21, a total of $436.27. The question for decision is whether the amounts received by the petitioner in the taxable years under the will of his father are subject to tax.
    FINDINGS OF FACT.
    The petitioner is an individual residing at Hailey, Idaho.
    His father, James McDonald, died January 13, 1915, a resident of the District of Columbia, leaving a will executed on June 26, 1913, m London, England, and a codicil thereto executed on April 13, 1914-, in New York City.
    By the terms of the will and the codicil the petitioner was to receive an annuity of $15,000 until he reached the age of 26 years, when it was to be increased to $18,000 until he reached the age of 30 years, and thereafter he was to receive $20,000 during his life or until the estate was divided. He was also to receive an additional annuity for each child living at the time of the death of the testator. The estate was to be divided upon the oldest surviving child of the petitioner reaching the age of 30 years, at which time the petitioner was to receive one-half of the estate.
    Subsequent to the execution of the will two children were born to the petitioner and his wife.
    In accordance with the terms of the will the executors of the estate of the testator paid to the petitioner the sum of approximately $25,000 in 1918 and approximately the same amount in 1919. These payments were made from the income of the estate.
    The executors of the estate had not been discharged during either of the years 1918 or 1919.
    A suit by the petitioner to have the will declared void as being in violation of the rule against perpetuities was instituted in the Supreme Court of the District of Columbia, and, upon dismissal in that court, it was appealed to the Court of Appeals. On May 3, 1926, the Court of Appeals entered a decree in the case (McDonald v. Maxwell, 12 Fed. (2d) 822), as follows:
    (1) That upon the death of the testator, James McDonald, the appellant, James McDonald, Jr., took a present vested interest in the undivided one-half of the testator’s estate after the payment of debts, specific legacies, annuities, and costs of administration, the corpus thereof to be paid to said James by the executors under the will when his oldest child living at the testator’s death shall reach the age of 30 years.
    (2) That pending the payment to said James of the principal of his one-half interest in said estate he is entitled to receive, and the said executors and trustees shall pay to him, in addition to the annuity provided for him by the codicil of said will, the cash income upon the said one-half interest accrued thereon to this date and the future cash income thereon from time to time as the same shall accrue hereafter.
    (3) That upon the death of the testator, James McDonald, the infant defendants and appellees, James McDonald, 3d, and Robert Alexander McDonald, took a present vested interest in the remaining one-half of the estate of said testator after the payment of debts, specific legacies, annuities, and costs of administration, the same to be divided between them, share and share alike, such division and distribution to be made when the oldest of said children shall reach the age of 30 years, and otherwise provided by the terms of the will.
    The decree also remanded the case to the lower court, which subsequently entered a decree embodying that part of the decision of the Court of Appeals set forth above and directing, so far as here material, as follows:
    III. That said 'executors and trustees be and they are hereby authorized and directed to restate their tentative First Account as Trustees ' filed by them October 16, 1925, and to charge to the corpus of the estate all debts, specific legacies, annuities, commissions, counsel fees and other costs of administration which may have been deducted from the income (excepting commissions heretofore allowed upon income) and to show in said account the net principal of the estate to be retained by them as trustees, and the net cash income therefrom, one-half of which net income shall be paid over and distributed to the plaintiff, James McDonald, Jr., upon executing and delivering to said executors and trustees the usual refunding bond to save them harmless.
   OPINION.

Arundell:

The Supreme Court of tlie District of Columbia by its decree, pursuant to the decree of the Court of 'Appeals, has directed the fiduciaries “ to charge to the corpus of the estate all * * * annuities * * We do not have the restated account of the fiduciaries before us, but it must be assumed that it will be rendered in accordance with the terms of the decree. The annuities paid the petitioner thus become charges against the corpus of the estate, and, under section 213(b) (3) of the Revenue Act of 1918, are not taxable.

The petitioner in his brief argues at some length as to the taxa-bility of income accumulated by the estate during administration. It does not appear from the pleadings or from the record that the Commissioner has found any deficiency against the petitioner 0n account of income of the estate, except the annuities paid in 1918 and 1919 which we have found to be charges 'against the corpus of the estate. No issue being raised by the pleadings as to the liability of the petitioner for taxes upon income accumulated by the estate, no question with respect thereto is before us for decision.

Judgment will be entered for the petitioner.


text:
    Lee Lash Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6190.
    Promulgated February 18, 1927.
    Amount deductible for compensation to salesmen employed upon a commission basis determined.

      Ferdinand Tannenbaum, Esq., for the petitioner.'

      Joseph K. Moyer, Esq., for the respondent.

      Petitioner appeals' from the determination by the Commissioner of deficiencies in income and profits taxes of $730.91 and $12,647.48 for the fiscal years ended August 31, 1919, and August 31, 1920, respectively, and from a determination that there should be assessed 25 per cent of the additional tax for the fiscal year 1920 because of delinquency in filing a return for that year. The deficiency for 1919 results from certain adjustments made by the Commissioner which are not questioned; the petitioner alleging that errors were made to its prejudice in its original return in computing the proper deductions for salesmen’s commissions, which errors were not corrected in computing the deficiency. The petitioner alleges that the Commissioner erred in the determination of the amounts deductible as salaries or other compensation to employees for services rendered in 1920, and in imposing a penalty for the fiscal year 1920 for failure to file a return. No evidence was offered upon the latter issue, petitioner contending that no tax was due and that the penalty would fall with the tax.
    FINDINGS OF FACT.
    The petitioner is a New York corporation with its principal office in Mt. Vernon. It is engaged in the business of manufacturing and leasing theatre curtains. It obtains contracts from theatres for the right to hang curtains therein, for which right it pays a consideration. It then sells the advertising space thereon. Its income is derived mainly from the rentals received from such advertising.
    For the purpose of securing advertisements and placing its curtains in theatres, vaudeville and moving picture houses, it employs salesmen on a commission basis. During the years in question the salesmen were employed under oral contracts and in most cases were allowe.d drawing accounts against which were charged the Commissions earned. In most cases the commission was 20 per cent of the business accepted by the petitioner, although in some instances the commission was a smaller amount. In most cases the commission became due and payable to the salesmen at the time the business was accepted by the petitioner, regardless of the time of payment. In some cases where contracts were canceled, the commission was charged back against the account of the employee. In the case of certain other business no commission was payable to the salesmen until collection had been made from the advertiser. One or two salesmen were employed upon a salary basis. The salesmen changed from time to time. During the fiscal years 1919 and 1920, petitioner had in its employ from twenty-five to thirty salesmen.
    The books of the petitioner were kept mainly upon the accrual basis. In the case of payments to the salesmen only amounts paid to thorn were entered in the expense account or in profit and loss for the year.
    Contracts for advertising space upon curtains were frequently for a period of more than one year. During the fiscal year 1919 the petitioner accepted contracts for advertising to be performed as follows:
    In the fiscal year 1919_$36,394.50
    In the fiscal year 1920_148, 377. 36
    In the fiscal year 1921_ 22,184. 86
    During the fiscal year 1919 there became due to salesmen as commissions upon such business $38,259.76. During that year there was paid to salesmen on account of commissions and drawing account $39,422.33. In the same year some of the salesmen left the employ of the company, their accounts being overdrawn by $3,885.35, such overdrafts representing the amount of the drawing account in excess of commissions earned.
    During the fiscal year 1920 the petitioner accepted contracts for advertising to be performed as follows:
    In the fiscal year 1920-$69,183. 75
    In the fiscal year 1921--- 209,138. 25
    In the fiscal year 1922-1- 46, 754. 25
    Upon account of such business the commissions earned by the salesmen amounted to $61,478.30. During the fiscal year the amount paid to salesmen upon account of drawing account and commissions was $76,420.57. The amount overdrawn by salesmen who left the employ of the corporation in the year 1920 was $6,521.88.
    It was the custom of the petitioner each year before closing its books to make an entry crediting an account known as “Advance Commissions ” and debiting profit and loss with an amount equal to 25 per cent of the business under contract to be performed in the following years. Such amount was thereupon set up as an asset in the balance sheet as “Advance Commissions,” being in the nature of a deferred charge. This amount was written off the books by contra entries on the first day of the succeeding fiscal year. The amounts so credited to profit and loss were as follows:
    August 31, 1918-1-:-$33,231.31
    August 31, 1919___ 47,248.03
    August 31, 1920_. 78,242.78
    The income reported by the petitioner upon its return for 1919 was the amount shown in its profit and loss account, after adjustment for dividends paid and non-taxable items. The amount deducted as commissions of the salesmen was the sum of the cash payments, and the amount of so-called advance commissions at the beginning of the year, less the advance commissions at the end of the year.

      In this manner there was deducted, as commissions paid to employees for 1919, $25,405.61. This amount has been used by the Commissioner in computing the deficiency.
    The petitioner filed no return for 1920. In computing the deficiency the Commissioner has-accepted the profit and loss account of the petitioner as the basis for his computations, making certain adjustments therein which do not affect the amount of commissions paid as reflected in the account. There has therefore been deducted as such commissions the amount actually paid as set out above, increased by the amount of the so-called advance commissions at the beginning of the year and decreased by the amount of the advance commissions at the, end of the year, or $45,425.82.
   OPINION.

Phillips:

The accounts of the petitioner with respect to commissions earned and paid to its salesmen are kept in a manner which is very confusing, so far as the determination of its true income for tax purposes is concerned. In other respects it appears to keep its books upon a proper accrual basis.

' The return filed by the petitioner for the fiscal year 1919 is based upon its progress as shown in its profit and loss account, no surplus account being kept. During that fiscal year this account shows a decrease in undivided profits of $13,312.27. It also indicates that during the year dividends of $17,748 were paid, leaving a net profit, as shown by that account, of $4,435.73, which was the income reported, certain adjustments being made for non-taxable income.

This account, however, does not reflect the true profit of the corporation for income tax purposes. At the close of each taxable year there has been added to the profit an amount equal to 25 per cent of the outstanding unfulfilled contracts for advertising, which amount lias been deducted on the first day of the following fiscal year. This amount was set up each year upon the balance sheet of the corporation as an asset, being in the nature of a valuation of the contracts then on hand. For income tax purposes it has no proper place in either the profit and loss statement or in the balance sheet. It further appears that, while all other accounts were kept upon an accrual basis, salaries and commissions paid for personal services were entered in the profit and loss account only as they were paid and not as they were earned. It appears therefore that for the two taxable years involved the commissions as entered in the profit and loss account were as follows:

For the fiscal year 1919.
Advance Commissions deducted Sept. 1, 1918_$83, 231. 31
Amounts paid to salesmen_ 39, 422. 33
72, 658. 64
Less advance commissions credited to profit and loss Aug. 31, 1919_ 47,248. 03
Amount of commissions as reflected in profit and loss account and in the return-'_-_'_ 25, 405. 61
For the fiscal year 1920. .
Advance commissions charged to profit and loss account
Sept. 1, 1919_:_$47,248,03
Commissions paid during year_ 76, 420. 57
123, 668. 60
Less advance commissions credited to profit and loss Aug. 31, 1920 _ 78, 242. 78 '
Amount of commissions as reflected in profit and loss account-,_ 45, 425. 82

These amounts were used by tl)e Commissioner without change in computing the deficiency.

The testimony establishes that the amounts earned by the salesmen which became due and payable to.them during those years were as follows:

1919-$38,259.76
1920-:_ 61,478.30

The taxable income should therefore be reduced in each of the taxable years by the difference between the amount earned by the salesmen and the amount deducted in computing the deficiency, as set out above.

In each of these years there were salesmen who left the employ of'the company and who had received by way of drawing account amounts in excess of the commissions earned. It is the contention of the petitioner that it is entitled to deduct such amount's. Counsel in his brief cites several New York cases to the general effect that, in the absence of an agreement for repayment, such amounts may not be recovered from salesmen on a drawing account, but there is nothing in the record from which we may determine whether or not these salesmen were under obligation to repay to the corporation the excess amount of the drawings and, if so, whether such amount could have been collected..

The Commissioner determined that therq should be assessed a penalty of 25 per cent of the tax for 1920 for failure to file a return for that year. There was no defense by the petitioner other than its contention that there was no tax due and consequently no penalty. In the recompntation of the deficiency, there should be added the penalty of 25 per cent of the tax liability, if any.

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


author: Phillips :

text:
    United States Corporation Bureau, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8443.
    Promulgated February 18, 1927.
    Invested capital held to have been properly reduced by an amount representing dividends paid to stockholders impairing the original invested capital.

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

      P. J. Rose, Esq., for the respondent.
    The petitioner appeals from the determination by the Commissioner of deficiencies of $277.28 and $254.61 in income and profits taxes for 1920 and 1921, respectively. It alleges that the Commissioner erroneously reduced its invested capital.
    FINDINGS OF FACT.
    The petitioner is an Illinois corporation with its principal place of business in Chicago. It publishes the National Corporation Reporter, a law publication for circulation among lawyers. It has no plant and its publication is printed under contract.
    The petitioner corporation was organized with a capital stock of $34,500, which was paid in by the stockholders in cash. Prior to 1905, all of its stock was owned by two individuals, Rowe and Moses. Moses died in 1905. Thereafter, Rowe each yeax made payments to Mrs. Moses of what he considered to be one-half of the earnings of the corporation until 1910, Avhen he acquired her stock.
    The taxpayer’s journal contains, under date of December 31, 1910, the following entry:
    Dividends, debit $26,689.43; credit Matküda W. Moses $13,344.72, Frederick A. Rowe, $13,344.71. Checks that were issued as dividends up to and inclusive of December 31, 1908 representing all earnings up to and inclusive of Deeembér 31, 1908,
    This amount of $26,689.43 was carried upon the books of the petitioner as an asset. The Commissioner computed invested capital for 1920 in the following manner:

      Capital stock_$34, 500. 00
    Surplus_i.- 9, 232. 53
    - $43,732. 53
    Less:
    (1) Preceding year’s tax, $1,943.93, prorated_ 818.75
    (2) Dividends, prior years_ 26, 689.43
    Total deductions_ 27, 508.18
    Invested capital adjusted_ 16, 224. 35
    A similar computation was made for 1921, with the exception that the amounts used were: Surplus, $12,362.79; preceding year’s tax prorated, $809.63.
    From December 31, 1910, to December 31, 1919, inclusive, the company declared dividends of $64,015.66.
   OPINION.

Phillips :

In computing the invested capital of the petitioner the Commissioner has reduced the amount originally paid in for stock by $26,689.43, alleged to be an impairment of the capital stock resulting from dividend payments to the stockholders. Under the name “ dividends ” this amount was carried upon the books as an asset of the company, although obviously without value. The petitioner’s sole witness explained that in 1908 or 1910 the first complete books of the company were set up and that he believes this amount represented operating deficits of prior years which were recorded in this manner to balance the accounts without showing an impairment of the capital. The record, however, does not sustain the conclusion that the amount so entered on the books as dividend payments to the stockholders was an operating deficit for it appears that payments were made annually from 1905 to 1910 to Mrs. Moses, as one of the stockholders. It is difficult to understand how the deficit can be attributed to operations when at the same time dividends were being paid, even though the witness did state categorically that all dividends were paid from earnings. Furthermore, the testimony of the witness discloses that he measured earnings entirely from the amount of money in the bank and that dividends were paid upon the basis of bank balances, apparently without considering whether their payment impaired the amount of the original investment. Upon the entire record, we are satisfied that prior to December 31, 1910, dividends of $26,689.43 were paid in excess of the earnings of the company.

But even assuming that the amount of $26,689.43 did in fact represent an operating deficit in 1910, the result must be the same. Despite this impairment of its capital, the company continued to pay dividends and from 1910 to 1919, the amounts so paid were in excess of the alleged deficit. It was the duty of the company to apply its earnings to the repairment of its capital before any amount should be paid in dividends to its stockholders. To the extent that dividends are paid in excess of profits and gains to the date of such dividends, they represent impairment of the original capital of the corporation by a distribution thereof to its stockholders; a return to them, not of earnings, but of a part of the amount invested in the business and the amount originally paid in must be reduced by the amount so returned to the stockholders.

The taxpayer further alleged that its invested capital was improperly reduced by a pro rata portion of the income and profits taxes of the prior year. The determination of this issue is controlled by the decision of the Board in Russel Wheel & Foundry Co., 3 B. T. A. 1168.

The determination of the Commissioner must be affirmed.

Decision will be entered accordingly.


author: Smith :

text:
    Monroe Cotton Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3310.
    Promulgated February 18, 1927.
    1. The depreciated cost of certain looms discarded during the years 1917, 1918, and 19Í9 held to be a legal deduction from gross income.
    2. The petitioner sold its entire product through a firm of selling agents in New York City. In 1918 it received an order through its selling agents for 300,000 yards of a certain grade of cloth, the order to be filled prior to November 30, 1918, and the cloth to be shipped as directed later. The cloth was manufactured and invoiced to its selling agents in New York City but the purchaser, finding that the first shipments received were not in accordance with specifications, refused to receive the balance during the year 1918. Held, that the manufactured cloth not shipped should have been included in petitioner’s inventory at December 31, 1918, at the cost thereof.

      J. O. Murphy, Esq., for the petitioner.

      Ward Loveless, Esq., for tbe respondent.
    This proceeding is for the redetermination of deficiencies for the years 1917, 1918, and 1919 in the respective amounts of $4,334.69, $21,708.11, and $8,109.88. There are two issues involved, namely, (1) whether the petitioner sustained a deductible loss in discarding certain of its factory machinery in the years 1917 and 1918, and (2) whether the proceeds from a certain contract for the sale of manufactured goods entered into during the year 1918 constituted income in that year or subsequently.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of Georgia, with its principal office and factory at Monroe. It is engaged in the business of manufacturing cotton cloth, operating both spindles and looms and employing the usual processes for manufacturing cloth from raw cotton.
    The corporation was organized in the year 1895 and the factory put in full operation during the year 1900. It has continued to operate up to the present time.
    In the year 1917 the petitioner found it necessary to replace certain of its factory equipment with more modern machinery. During that year and the two succeeding years, a large number of its looms were removed from the factory and new automatic looms were installed. The discarded looms were known as the plain, heavy type Whiting looms and were designed for manufacturing sheeting and twills. The first lot of these looms was installed during the early part of the year 1896. There were 120 of this lot. About two years later 40 more of the same type looms were installed. The cost of these looms is not shown. During or about the year 1900, 150 more of the same type looms costing $50 each were installed. During or about the following year, 30 more looms costing $57 each were installed. By about the end of the year 1901 a total of 530 looms of this type had been installed in the factory.
    During the year 1917, 300 of the old looms were discarded and replaced with new automatic looms. The discarded looms were sold at salvage value for $3,000. Of these looms, 150 had been installed during the year 1899 or 1900 at a cost price of $50 each. They had been in use up to the time they were discarded in 1917. During the year 1918, 102 more of the old looms were discarded. During the year 1919, the 30 looms costing $57 each were discarded. These looms had not been operated since 1915 or 1916. In prior years the factory had been operating both day and night. The non-use of a part of the discarded looms had resulted from the discontinuance of night operation.
    The old looms when discarded were in good working condition and capable of practically as efficient work as when new, but it was considered unprofitable to operate them in competition with the new type of automatic looms. On a comparative basis of unit production, the old looms were capable of a production of 75 per cent or 80 per cent as against a production for the new looms of 90 per cent or 95 per cent. One weaver could operate only about 8 of the old looms successfully, while, of the new looms, a weaver could operate 14 or 15 in weaving sateens and as many as 26 in weaving sheetings.
    All of the looms in use were kept in a highly efficient state of repair. The working parts of the looms, such as pick balls, cams, crank shafts, gears, etc., were replaced with new parts whenever they became sufficiently worn to lessen materially the efficiency of the loom. This was necessary in order to produce the good quality of cloth that the trade demanded.
    The March 1, 1913, depreciated cost of the looms was in excess of their depreciated cost at the date of abandonment.
    During the year 1918 the firm of Haines, Morehouse & Woodford, of New York City, selling agents for cotton mills, were the sole selling agents of the petitioner under the terms of a contract entered into in the year 1916. This contract of employment provided in part as follows:
    Second : The said parties of the second part [Haines, Morehouse & Wood-ford] agree to use their best endeavors to sell the output of said mills and guarantee said party of the first part against any loss from bad debts on goods received by them and sketched as having been sold for said party of the first part, and the said parties of the second part also agree on the receipt of goods to advance to said party of the first part on all of said goods so shipped to them or by their instructions up to seventy-five (75%) per cent of the net cash value of the said shipments, and it is also agreed between the parties hereto that said parties of the second part are to have a first lien on said goods for the amount of such advances so made.
    After this contract bad been entered into it was the practice of the petitioner to invoice all goods manufactured by it upon orders received to Haines, Morehouse & Woodford. The petitioner’s books of account were kept upon the accrual basis. When the goods were invoiced to the selling agents the selling agents were charged with the sales price and were credited with their commissions upon the goods invoiced.
    In May, 1918, the petitioner received through the aforementioned agents an order on behalf of M. Lowenstein & Sons, Inc., of New York City, dated May 29, 1918, for 300,000 yards of a certain cloth, to wit, as hereinafter described.
    Fabric-4 Leaf Twills. Tape Salvage
    Width_ 37 inches. Count, warp 88. Filling, 40.
    Weight_Not lighter than 2.85 yards to ib.
    Price per yard_30 cents.
    Terms_2% 10 days 60 extra and subject to our usual commission.
    Delivery_At mill, November — earlier if possible.
    Ship to_As directed later.
    Freight prepaid to New York City, or to such finishing works as it is usual for us to prepay freight.
    Seconds up to 5 per cent to be taken at 10 per cent less per yard.
    Seconds to be included in above quality.

      The order from which the foregoing material parts, are taken resulted from the exchange of certain letters and telegrams between the petitioner and its agents, Haines, Morehouse & Woodford, and constituted the final contract for the sale of the goods.
    The goods specified in the contract were a usual and ordinary-product of the petitioner’s factory. During the year 1918 the entire 300,000 yards, plus an additional 128 yards of such goods, were manufactured and invoiced to Haines, Morehouse and Woodford between November 9 and November 27, 1918. It was the custom for the petitioner to invoice contract goods to its agents, Haines, Morehouse & Woodford, prior to shipment in order to secure money advances thereon. Such advances were made on the aforementioned invoices and interest to the amount of $1,415.98 was subsequently paid thereon. All of the goods so invoiced had been packed in bales ready for shipment on receipt of shipping instructions from M. Lowenstein &' Sons, Inc., and each bale was given a number as a means of identifying it. Commissions on the total sales amounting to $2,271.08 were credited to Haines, Morehouse & Woodford during the year 1918.
    At December 31, 1918, 67,197 yards of the contract goods had been shipped by the petitioner pursuant to the aforementioned contract. No further shipping orders were received during 1918, nor were any of the remaining 232,931 yards of the contract goods shipped during that year. The refusal of M. Lowenstein & Sons, Inc., to give shipping instructions for the remainder of the contract goods was clue to dissatisfaction with the quality of the goods already shipped. It was alleged in numerous complaints by M. Lowenstein & Sons, Inc., that the goods' in question did not measure up to the standards specified in the contract, in that certain of the pieces were underweight and'contained flaws such as “picks” and “ hanging threads.” These complaints were made to Haines, More-house & Woodford as early as October, 1918.
    The superintendent of the petitioner’s mills went to New York in the early part of 1919 to inspect some of the goods previously shipped and found that the above-mentioned defects did exist. The petitioner sought legal advice with respect to enforcing compliance with the terms of the contract and was informed that .it would not be advisable to bring suit. Finally, it was agreed by way of settlement, about the middle of 1919, that M. Lowenstein & Sons, Inc., should accept the remaining 232,931 yards of goods on consideration that the petitioner allow a credit on the original contract purchase price of $15,000. By way of further adjustment the petitioner reexamined all of the remaining goods in its warehouse, going over each bale and removing all light or defective pieces and substituting newly manufactured and better quality pieces instead. A part of the goods already shipped prior to December 31,1918, bad been so treated before shipment.
    The remaining 232,931 yards of cloth were shipped as directed by M. Lowenstein & Sons, Inc., on the following dates in the amounts named:
    Date. Yards.
    January 29, 1919- 25, 237
    June 4, 1919_44,107
    June 4, 1919_55,124
    September 16, 1919_ 24,799
    November 4, 1919_,_23,176
    November 4, 1919_ 35, 921
    January 4, 1920- 9,649
    January 19, 1920_14,918
    The petitioner had little or no direct communication with M. Lowenstein & Sons, Inc., relative to the transactions. Practically all negotiations, including the aforesaid final settlement agreement, were conducted by and through Haines, Morehouse & Woodford. As was the general custom, the purchase price for the goods was paid by the purchaser to Haines, Morehouse & Woodford and payment was made by them to the petitioner.
    Under date of May 26, 1919, an entry was made on the books of the petitioner charging the aforementioned $15,000 to “ cloth account,” and Haines, Morehouse & Woodford was credited with a like amount on the ledger. The petitioner’s closing inventory for 1918 excluded the aforementioned 232,931 yards of cloth invoiced during that year to Haines, Morehouse & Woodford. In making its income-tax return for 1918 the petitioner included in the gross income the total amount of the sales price of the goods under the said contract with M. Lowenstein & Sons, Inc., and deducted from gross income the commissions credited to Haines, Morehouse & Woodford on the total contract sales. The cost and inventory value of the said 232,931 yards of cloth was $40,147.87. The sale price of the same was $69,879.30.
    The statutory invested capital of the petitioner for the year 1918, without any adjustment on account of the inventories here in question, was $250,983.23.
   OPINION.

Smith :

The losses resulting from discarding certain of its looms during the years 1917 and 1918, in whatever amount actually sustained are proper deductions from net income for those years under the provisions of section 234(a) (7) of the Revenue Act of 1918. Appeals of Dilling Cotton Mills, 2 B. T. A. 127; Automatic Transportation Co., 3 B. T. A. 505, et alia.

The evidence is convincing that at least a part of the losses claimed was actually sustained. It is shown that all of the looms in question bad been in nse for about seventeen or eighteen years. They were all of the same type and pattern and had cost approximately the same when new. The records showing the actual cost of each lot of looms were not available, but it was shown that one lot had cost $50 each and another lot $57 each. A minimum cost price of $50 each may be ascribed to all of the looms discarded.

It is further shown that all the looms had been kept in good repair; that the working parts were renewed from time to time as they became worn. J. Wheeler Mears, superintendent of the factory since it first began operation, testified that the old looms when discarded were capable of practically as efficient work as when new, and that they would not have been discarded but for the fact that the new automatic looms could be operated more economically and more profitably. There is no doubt that the petitioner was forced under stress of keen competition and marked industrial progress to abandon the old looms long before the expiration of their natural useful life. Under the taxing statute above referred to, the petitioner should be allowed the deduction of whatever loss was thus sustained.

While it may be true, as contended by the petitioner, that the looms with proper care might have been kept in use indefinitely, we are inclined to set a more conservative limit on their actual useful life. Appeal of Dilling Cotton Mills, supra. The evidence warrants a finding that the loss on each discarded loom was $25, or 50 per cent of the minimum cost thereof, less $10 salvage value of each loom.

Under the terms of the contract of sale evidenced by the order set forth in the findings of fact, the petitioner agreed to sell M. Lowenstein & Sons, Inc., a certain quantity of a specified kind of cloth on or before November 30, 1918. The order was dated May 29,1918. At that time the goods were neither ascertained nor manufactured. During the year 1918 the goods were all manufactured but not all shipped. The petitioner kept its books of account upon the accrual basis and its books of account for 1918, as originally closed for that year, showed the sale of the total amount of the goods ordered through its selling agents at the contract price and they also showed a credit to the selling agents of the commissions to which they were entitled in respect of the order. The petitioner now contends that its books of account were in error in this regard; that the cloth had not been shipped to M. Lowenstein & Sons, Inc., during the year 1918, and that there was no way by which the purchaser could be required to accept the goods inasmuch as the purchaser had the right to satisfy itself that the goods were of the description and quality ordered before they were bound to accept them; that the goods were not sold within the year 1918, and that the goods which had been manufactured for the order but not shipped at December 31, 3918, should have been reflected in the petitioner’s inventory at cost and not in sales at the contract price. The respondent contends that, inasmuch as the petitioner made its returns upon the accrual basis, and inasmuch as the books of account show that the goods manufactured for the order were sold during the year 1918, the petitioner is obligated to include in its income for 1918 the profit which it would have received upon the contract if the goods had been accepted by the purchaser at the contract price.

The contract here in question was made in New York State and is governed by New York law. Section 128 of the Personal Property Law (Laws 1909, ch. 45) provides in part:

1. Where goods are delivered to the buyer, which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity to examine them for the purpose of ascertaining whether they are in conformity with the contract.

The rule under the common law was the same. It is unnecessary to review the innumerable cases in point. The rule was clearly laid down by the Supreme Court in Pope v. Allis, 115 U. S. 363. The court there said:

When the subject-matter of a sale is not in existence, or not ascertained at the time of the contract, an undertaking that it shall, when existing or ascertained, possess certain qualities, is not a mere warranty, but a condition, the performance of which is precedent to any obligation upon the vendee under the contract; because the existence of those qualities being part of the description-of the thing sold becomes essential to its identity, and the vendee can not be obliged to receive and pay for a thing different from that for which he contracted. * * *
The authorities cited sustain this proposition, that when a vendor sells goods of a specified quality, but not in existence or ascertained, and undertakes to ship them to a distant buyer when made or ascertained, and delivers them to the carrier for the purchaser, the latter is not bound to accept them without examination. The mere delivery of the goods by the vendor to the carrier does not necessarily bind the vendee to accept them. On their arrival he has the right to .inspect them to ascertain whether they conform to the contract, and the right to inspect implies the right to reject them if they are not of the quality required by the contract. The rulings of the Circuit Oourt were in accordance with these views.

The goods here in question were rejected during the year 1918 and found to be in fact subject to the imperfections charged by the buyer. Only after material adjustments were made was the contract ever fully performed.

We have no doubt that the course followed by the petitioner was the natural and customary one according to good business practices and within the reasonable expectation of the contracting parties. The petitioner’s books of account for 1918 did not reflect its true income for the year 1918 for the reason that they reflected a profit upon the sale of goods to M. Lowenstein & Sons, Inc., in excess of the true profit. At the close of 1918, M. Lowenstein & Sons, Inc., was under no binding contract to accept the goods which had been manufactured for it by the petitioner but which did not measure up to specifications and which had not in point of fact been accepted by the purchaser. The Commissioner’s own regulations (article 1581, Regulations 45) provide:

The inventory should include merchandise sold but not shipped to the customer at the date of the inventory, together with any merchandise out upon consignment.

The 232,981 yards of cloth having an inventory value of $40,147.81 at December 81, 1918, should have been included in the petitioner’s inventory at that date and not in its sales at the price of $69,879.30. Likewise, the petitioner should not have deducted from gross income any commissions in respect of these goods whieh had been credited upon its books of account to Haines, Morehouse & Woodford.

Judgment will be entered on 15 days’ notice, v/nder Bule 50.


text:
    Federal Schools, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9625, 13095.
    Promulgated February 18, 1927.
    The evidence fails to show that the petitioner is entitled to have its profits taxes assessed under the provisions of section 328 of the Revenue Act of 1918.

      L. M. Hirschtritt, Esq., for the petitioner.

      Henry Bavenel, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies in income and profits taxes for 1919 in the amount of $18,211.86, and for 1921 in the amount of $2,776.87. The deficiency letter for 1919 asserted a deficiency of $18,692.59, but the respondent in his answer admits that the deficiency is $18,211.86.
    The proceedings for the two years were consolidated.
    In the petition relating to the year 1919, the petitioner assigned seven errors. After considerable testimony had been introduced relating to the various errors assigned, the petitioner and the respondent, through their respective counsel, entered into a stipulation by which the petitioner waived all issues except with respect to its claim for relief for 1919, under the provisions of section 328 of the Revenue Act of 1918, with respect to which certain testimony was introduced in addition to the stipulation. With respect to the proceeding for the redetermination of the deficiency asserted for 1921, the petitioner and the respondent also entered into a stipulation through their respective counsel.
    FINDINGS OF FACT.
    The petitioner is a Minnesota corporation, organized in 1914, having its principal office at Minneapolis. It operates a corre-, spondence school, selling courses in commercial designing and cartooning, and its student contracts for tuition are payable in ten monthly installments. The correct net income of the petitioner for 1919, computed on a cash basis, was $51,106.72. The invested capital for 1919 was $71,268.19.
    During the years 1915 to 1918 the petitioner expended for advertising its commercial designing and cartooning courses $74,917.31, as shown by its books of account. There were outstanding on December 31, 1918, as shown by the petitioner’s books of account, contracts receivable, representing the amount due on students’ contracts for tuition, $315,445.23, payments on which were received by the petitioner with respect to the years in which the sales were made as follows:

    The correct net income of the petitioner for 1921 was $11,070.68. The invested capital for the said year 1921 was $71,636.91.
    The petitioner paid its officers, for services rendered during 1919, $14,761.25. The officers rendered services in connection with instruction, advertising and selling supplies to students in connection with general correspondence and office routine. The volume of business of the petitioner depended, in a great measure, upon the efforts of its officers. During 1919 the petitioner had in its employ about seventy-six persons, including its salesmen. With the exception of its officers, they were mostly clerks and stenographers. They were mostly employed in Minneapolis, but certain salesmen were employed in other parts of the United States, who sold on a commission basis.
   OPINION.

Trammell:

As the result of the stipulation entered into, the only question for 1919 is whether the petitioner is entitled to have its profits taxes assessed under the provisions of section 328 of the Revenue Act of 1918. All other alleged errors were waived. The net income and invested capital for both 1919 and 1921 were stipulated.

From the evidence introduced we find no abnormalities of income or capital which would warrant the assessment of the taxes under the provisions of section 328. The taxes should, therefore, be assessed in accordance with the foregoing findings of fact.

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