author: Trammell:

text:
    Appeal of Potter Farms, Inc.
    Docket No. 5928.
    Promulgated February 10, 1927.
    1. On the evidence, held, that the sale of real property made in 1920 was not on the installment plan; that sales made in 1921 were on the installment plan.
    2. Reductions in depreciation and invested capital approved for lack of evidence.

      Frederic G. Bastían, Esq., for the petitioner.

      Ward Loveless, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income and profits taxes for 1920 and 1921, in the amount of $5,025.64. The deficiency arises from reduction of invested capital, disallowance of depreciation claimed by taxpayer, and the inclusion of negotiable promissory notes received by the taxpayer upon the sale of land in the computation of the gain or profit realized by the sale.
    FINDINGS OP PACT.
    The taxpayer is a corporation organized in 1916 under the laws of Virginia, with an office in New York City. It was incorporated under the name of Norfolk Southern Farms, Inc., but on June 3, 1918, its name was changed to Potter Farms, Inc.
    The taxpayer, the Potter Store, Inc., and Norfolk Southern Drainage Corporation were affiliated corporations during 1920 and 1921, and consolidated returns were filed showing no tax due.

      During (be year 1916, the taxpayer purchased 45,565 acres of woodland in North Carolina which had to be cleared and drained preparatory to its use as farm land. During the years 1917 to 1921, inclusive, the taxpayer was engaged in the development and sale of the acreage above mentioned. Potter Store, Inc., one of its subsidiaries, operated a general store on the tract during the said period. Norfolk Southern Drainage Corporation, its other subsidiary, during said period did certain development work on the tract, consisting of the construction of drainage ditches. The said tract is located in one of the drainage districts created under the drainage law of North Carolina, known as the Albemarle Drainage District. Drainage bonds were issued and sold to defray the cost of drainage and taxes were assessed against the land within the drainage district to pay the drainage bonds. These assessments constitute a lien subject only to state and county taxes.
    A sale of 160 acres was made in 1920, for a total purchase price of $8,800. A cash payment of $2,400 was received by the taxpayer. The remaining $6,400 was secured by five equal purchase-money notes maturing in successive years, bearing interest at the rate of 6 per cent. In 1921 two sales were made of 640 acres each. The purchase price of one of the sales was $36,800. A cash payment of $6,400 was received by the taxpayer. The remaining $30,400 was deferred and was secured by five equal purchase-money notes maturing in each successive year with interest at 6 per cent. The purchase price of the second sale was $33,600. A cash payment of $6,400 was received by the taxpayer. The remaining $27,200 was deferred and secured by five equal purchase-money notes maturing in each successive year and bearing interest at 6 per cent.
    The Commissioner for 1920 and 1921 included in the taxpayer’s gross income the face value of the notes received in connection with the sales of land made during those years.
    It was stipulated that if only the cash payment received by the taxpayer in 1920 was to be considered in determining the taxable income for that year, the gross income from the sale of land for the year 1920 is $1,671.26, but if the total purchase price, including the deferred installments, is to be considered in determining taxable income, the amount of the gross income from the sale of land is $6,128.00.
    It was also stipulated that if only the cash payments received by the taxpayer in 1921 were to be considered in determining taxable income, the gross income from the sales of land for the year 1921 is $8,444, but if the total purchase price, including the deferred installments, is to be considered in determining taxable income, the amount of gross income from the sale of land is $46,492.16.

      None of the purchase-money notes were ever discounted. However, three of them were pledged as collateral in connection with a loan obtained by the taxpayer. In order for the taxpayer to get this loan, however, it was necessary to have its president endorse the note given by it in addition to pledging the collateral.
    The Commissioner reduced the deductions taken for depreciation by $1,160.48 for 1920, and $1,099 for 1921, on the basis that the amounts deducted were excessive.
    The returns filed by the taxpayer for the years 1917, 1918, and 1919, did not show any taxable income for those years.
    The Commissioner reduced the taxpayer’s invested capital for 1920 and 1921 by $256,889.26, claimed by it on account of alleged profits for prior years.
   OPINION.

Trammell:

The questions involved in this appeal are: (1) How should the income from the sales of land during 1920 and 1921 be determined and what was the amount of income for each year; (2) what further deduction for depreciation than that allowed by the Commissioner is the taxpayer entitled to for 1920 and 1621; (3) should invested capital as determined by the Commissioner be increased by the amount of $256,889.26; and (4) should the total amount of income and profits taxes for 1920 be excluded in the computation of taxpayer’s invested capital for 1921?

By section 1208 of the [Revenue Act of 1926, the pertinent provisions of section 212 (d) of that Act. are made applicable to sales of real estate made in the years 1920 and 1921.

Section 212 (d) reads as follows:

(d) Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term “ initial payments ” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

The regulations issued in pursuance to the authority granted by the Act are contained in Treasury Decision 3921. The pertinent portions of these regulations are:

SALE OF REAL PROPERTY INVOLVING DEFERRED PAYMENTS.
Under section 212 (d) of the Revenue Act of 1926 deferred-payment sales of real property fall into two classes when considered with respect to the terms of sale, as follows:
(1) Sales of property on the installment plan; that is, sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made do not exceed one-fourth of the purchase price.
(2) Deferred-payment sales not on the installment plan; that is, sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made exceed one-fourth of the purchase price.
Sales falling within class (1) and class (2) alike include (a) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the purchase price has been paid, and (b) sales where there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments.
SALE OF REAL PROPERTY ON INSTALLMENT PLAN.
In transactions included in the first class of deferred-payment sales the vendor may return as income from such transactions in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the property is paid for bears to the total contract price.

In 1920 one sale was made. The purchase price was $8,800; the cash payment was $2,400, which was in excess of one-fourth of the purchase price. This sale, therefore, is not one on the installment plan as provided by statute, and the income therefrom may not be computed and returned on the installment basis.

In sales not on the installment plan the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash to the amount of their fair market value. As no evidence was introduced to show the value of the notes received in connection with this sale, or the financial ability or standing of the maker, the determination of the Commissioner that they had a fair market value equal to their face value will not be disturbed. Appeal of Aaron W. Wolfson, 1 B. T. A. 538. Taxpayer’s gross income from this sale, therefore, was $6,128.

Of the two sales made in 1921, one was for $36,800, of which $6,400 was a cash payment. The selling price of the other was $33,600, and a cash payment of $6,400 was made. Since the cash payment in each of these sales was less than one-fourth of the purchase price, the sales are to be regarded as on the installment plan, ánd the taxpayer may return as income from such sales that proportion of the cash payment received in 1921 which the total profit to be realized when the property is paid for bears to the total sale price. The gross income in 1921 computed on this basis was $8,444.

Relative to the question of depreciation, the taxpayer contends that both of the disallowances were erroneous as a matter of law; that the Commissioner made the disallowances arbitrarily and not upon any claim that depreciation taken by the taxpayer was unreasonable. The question raised by the taxpayer is whether there is lawful authority for the disallowance of depreciation by the Commissioner on the theory pursued by him. This contention of the taxpayer is without merit. Appeal of Atkins Lumber Co., 1 B. T. A. 317. The amount of the depreciation deduction is to be determined from all the facts in each case. When the Commissioner determines that the deduction should be less than the amount claimed by a taxpayer, then the taxpayer must introduce evidence to show that the action of the Commissioner is erroneous. This the taxpayer has not done in this case.

On the question of invested capital, the stipulation filed shows that the greater part of the selling price of farms sold in 1917, 1918, and 1919, was not paid and there is no evidence that the amount of $256,889.26, excluded from invested capital on account of alleged profits from the sales of those years, should be included therein. The determination of the Commissioner in that respect is, therefore, approved.

The remaining issue is in regard to the amount of income and profits taxes for 1920 and its relation to invested capital for 1921. The invested capital for 1921 should be adjusted by including therein the prorated amount of income and profits taxes for 1920 in accordance with section 1207 of the Eevenue Act of 1926.

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


source: Caselaw Access Project

author: KoRneR, Chairman:

license: Public Domain

text:
    Jessie G. Sheen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 543.
    Promulgated February 10, 1927.
    Petitioner is entitled to a deduction for an amount paid to agents in tile sale of real estate.

      Morey Dunn, Esq., for the petitioner.

      A. R. Marrs, Esq., for the respondent.
    Proceeding for the redetermination of a deficiency in income tax for the year 1919 in the amount of $727.26.

      Petitioner was formerly Mrs. Jessie G. Sheen, widow, and notice of the determination of the deficiency here in controversy was mailed to her under that name. She has since remarried and is now Mrs. Jessie G. Sheen-Westberry.
    Her former husband, Franklin Sheen, died testate in 1917, appointing the petitioner his executrix. The petitioner filed an income-tax return for the calendar year 1919, and therein reported $4,448.18 as received from “ Estate of Franklin Sheen as fiduciary for beneficiaries,” and paid a tax thereon.
    In the same return the petitioner reported a profit of $8,000 from the sale of certain real estate in the year 1919. This sale was reported as a sale made on the installment or deferred payment plan. The initial payment received by her in this transaction was more than 25 per cent of the selling price and the Commissioner determined that for income-tax purposes the transaction was a cash transaction and the entire profit taxable in the year in which the transaction occurred. The petitioner failed to take a deduction in her tax return for $2,000 commissions paid to agents in effecting the real estate transaction. She paid this commission of $2,000 in the taxable year.
   OPINION.

KoRneR, Chairman:

The petitioner takes no exception to the determination of the Commissioner that the real estate transaction in 1919 was a cash transaction, but now claims that in computing the profit thereon she is entitled to deduct a commission of $2,000 paid to agents in that transaction. The evidence that she paid this commission is uncontradicted and her contention in this respect is allowed. She is entitled to a deduction of $2,000.

The other issue involves the right of petitioner to eliminate from her taxable income $4,448.18 reported by her in her tax return, but which she now claims was so reported in error. Her contention is that the amount in question was received by her in a fiduciary capacity from the estate of her former husband. If proof of this fact had been adduced, the contention of the petitioner might properly be allowable. But such proof is lacking in this record. The petitioner was unable to testify whether the fiduciary capacity under which she claims was that of executrix, guardian or trustee. She testified that her former husband had left a will but no showing of its provisions was offered to the Board. She testified that she had been advised by a former legal adviser that she occupied a fiduciary relationship to the money in question. Beyond that she seemed unable to go. The declarations contained in the tax return bearing on this point are clearly self-serving declarations in this proceeding. The petitioner’s contention as to this second issue is not sustained.

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


author:
Lansdon :
      Murdock,

text:
    E. H. McConnell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3211.
    Promulgated February 10, 1927.
    1. Deduction alleged to represent bad debts in the nature oí uncollectible balances on merchandise accounts allowed.
    2. Discounts to customers on account of defective merchandise allowed.
    3. Loss on account of loan to a debtor who became insolvent in the taxable year allowed.
    4. Loss on account of death of live stock purchased by petitioner allowed.

      Don R. IIutcMnson, Esq., and Edwin 0. Dutton, Esq., for the petitioner.

      J. K. Moyer, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income taxes for the years 1918 and 1919 in amounts not disclosed by the record. The controversy arises from the disallowance of a deduction of $746.44 made by the petitioner from his income for the year 1918, on account of bad debts, and of deductions of $13,076.30 and $1,000, respectively, on account of bad debts and loss of live stock in the year 1919.
    FINDINGS OF FACT.
    The petitioner is an individual engaged in selling furniture on the installment plan in the City of Memphis, Tenn., and in conducting a farm in Mississippi. He commenced the furniture business in 1914. His gross sales for 1918 amounted to $302,772.77, and, for 1919, $604,318.69.
    The furniture business was all, or practically all, conducted on the installment basis. Each purchaser entered into a contract prepared on a printed form and signed in duplicate. Payments for the goods were required to be made weekly, semi-monthly, or monthly, as the case might be. One copy of the contract was held by the proprietor and the other by the purchaser. Title to the goods did not pass until payment was made in full, but the goods were immediately delivered to the purchaser. The contract was handed to the bookkeeper, -who opened a loose-leaf single entry ledger account in which the purchaser was charged with the full price of the goods and credited with the initial payment thereon, and subsequently all payments on account, discounts allowed for various reasons, and commissions for bringing in new customers, were credited to the purchaser át the dates when made.
    In case of default in payment, an account was shortly thereafter put into the hands of a collector, who visited the purchaser, if he or she could be found, and made collection, if possible. If the collector failed to secure payment, the accounts were put into the hands of attorneys for collection, if deemed advisable.
    Toward the close of the year, in November, or the latter part of October, the proprietor went through the books and removed therefrom the pages containing such accounts as he could not collect and placed them in a bad debt ledger, and as soon thereafter as practicable, the bookkeeper ascertained the amounts unpaid and credited them tó loss and gain.
    The petitioner computed his income for the taxable years by taking his gross sales as a basis. From this he deducted the cost of merchandise, with due consideration of the effect of opening and closing inventories, and thereby arrived at gross profits. From the amount of gross income so determined he then deducted expenses, discounts and uncollectible balances on customers’ accounts.
    In his income-tax returns for the years 1918 and 1919, the petitioner deducted from his gross profit for each year the respective amounts of $746.44 and $13,076.30, as bad debts ascertained to be worthless and charged off in the taxable years. Upon audit of such returns the Commissioner computed the petitioner’s income on the accrual basis, added the amounts so deducted to gross income, and determined the deficiencies here at issue.
    The amounts deducted from gross income by the petitioner, and disallowed by the Commissioner, consisted of balances due on accounts which the petitioner had ascertained to be worthless, discounts allowed to purchasers on account of inferior or damaged goods, and an amount of $2,500 loaned by the petitioner to one William Garrett, who was engaged in the soft drink business. All attempts to collect this loan resulted in failure. .Garrett became insolvent, and at December, 1919, had no assets.
    In 1919 the petitioner purchased two mules, paying $50 for one and $100 for the other, one horse for $100, and. 75 hogs at an average cost of $10 each, and sent them to his farm in Mississippi, where the manager took charge of them. Later in the year there was an epidemic of hog cholera in that section, which carried off all his hogs. The mules and horse died before the pjpse of the year, The loss sustained from the death of these animals was not covered by insurance.
   OPINION.

Lansdon :

The petitioner claims deduction from his gross income for each of the years 1918 and 1919 in the respective amounts of $74.6.44 and $13,076.30, as bad debts ascertained to be worthless and charged off in such years. The record discloses that the amounts in question included uncollectible balances on installment accounts with purchasers, discounts allowed to customers on account of inferior or damaged merchandise, and the amount of $2,500, representing a cash loan made to a man who became insolvent during the year 1919.

The evidence is conclusive that all the amounts included in the petitioner’s claim are proper deductions from gross income. We are satisfied with the proof that debts so included were ascertained to be worthless and charged off during the taxable years. The discounts for inferior or damaged merchandise were ordinary business expenses not otherwise or elsewhere deducted from income. The loan was made in cash, and at the end of the year the borrower was insolvent, and without assets of any description.

The only question that can arise in connection with the allowance of these amounts is whether that part of the total which represents uncollectible accounts and discounts to purchasers was ever charged into income. The petitioner testified that he used the amount of gross sales for any year as the starting point for computing his profits from operations for such year, and that from such amount he deducted cost of merchandise, expenses of operations, including discounts and commissions, and uncollectible accounts. This method indicates that the petitioner kept his accounts and made his income- ‘ tax returns on the accrual basis. We are confirmed in this conclusion by the fact that upon audit of the returns for the taxable years the Commissioner employed the accrual basis in computing the income as to which he asserted the deficiencies here involved. We are convinced that the petitioner kept his books and made his income-tax returns on the accrual basis, and that the amounts claimed as deductions on account of bad debts, discounts to customers, and loans, were all included in gross income, and that the petitioner is entitled to deduct such amounts as bad debts and expenses.

The evidence that the animals in question were purchased by the petitioner, their cost, and that all died in the taxable year 1919, is clear and uncontradicted. The cost of such animals in the amount of $1,000 is a proper deduction for income purposes from the petitioner’s gross income for the year 1919.

Judgment will be entered for the 'petitioner.

Murdock,

dissenting: I dissent from the above opinion in so far as it allows a deduction for debts ascertained to be worthless and charged off during the taxable years, representing alleged uncol-lectible balances on merchandise accounts. There is nothing in the findings of fact to show that the accounts were “ ascertained to be worthless ” as this Board has interpreted that phrase. We do not Know the financial condition of the creditors, nor any other facts upon which the ascertainment of worthlessness could be based. The goods might have been recoverable and something might have been realized from their sale. Therefore, I am of the opinion that the petitioner has failed to prove the incorrectness of the Commissioner’s determination in regard to this item.


author: Teammell:

text:
    Northwestern Steel & Iron Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5521.
    Promulgated February 10, 1927.
    The evidence fails to show that the petitioner acquired good will for stock for invested capital purposes.

      Stanley B. Houeh, Esq., and W. T. Smiley, Esq., for the petitioner.

      F. 0. Graves, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended October 31,1920, in the amount of $1,160.26. The deficiency arises on account of the action of the respondent in disallowing in invested capital any value attributable to good will alleged to have been acquired by the petitioner for stock at the time of its organization.
    FINDINGS OF FACT.
    The petitioner was incorporated under the laws of Minnesota in 1910, under the name of the Gas Traction Foundry Co. Its principal office is in Minneapolis. The name of the petitioner was changed in 1920 to the Northwestern Steel & Iron Corporation. At the time of the organization of the corporation it issued its capital stock of the par value of $75,000 as follows:
    D. O. Gamm_$25, 000
    D. A. Potter__— 25,000
    Gas Traction Go_1- 24, 900
    Glover_ 100
    75, 000
    Good will was set up on the books of the petitioner at $75,000.

      Gamm and Potter bad been employed by the Stickney Foundry Co. for a period of approximately eleven years prior to the organization of the Gas Traction Foundry Co. The Gas Traction Co. was a manufacturing corporation with which Glover was associated and which was a customer of the Stickney Foundry Co. Prior to the organization of the petitioner an agreement was entered into between the Gas Traction Co. and Gamm and Potter, as follows:
    This agreement, Made this 4th day of April, 1910, by and between Gas Traotioh Company, a corporation of Minneapolis, Minn., party of the first part, and C. C. Gamm and D. A. Potter of St. Paul, Minn., parties of the second part,
    Witnessetii :
    That, whereas, it is the desire of the party of the first part to have erected adjacent to their factory in Minneapolis, Minn., a foundry at which the castings needed by the party of the first part in its business of constructing Gas Traction engines may be manufactured more conveniently for the party of the first part, and, so far as possible, under the supervision of the party of the first part, thus effecting a saving in the cost of such castings and of their transportation and delay in their delivery; and,
    Whereas, the parties of the second part have been long in the business of operating a foundry in St. Paul and have built up a good reputation and a valuable good will, as expert foundry men; and said parties have heretofore manufactured for the party of the first part a large part of the eastings used by it in its business during the years 1909 and-1910, to the entire satisfaction of the party of the first part; and,
    Whereas, it is the desire of the parties of the second part to secure the means by which they can enter into a business as foundry men in which they shall have a controlling interest so that their labor and skill in the operation of such business shall result primarily to their own advancement; and all of the parties hereto desire that a foundry business shall be established and operated in Minneapolis in such a way as to advance, so far as possible, the interests of all of the parties hereto; and so that it can be operated to the mutual advantage of all of the parties;
    Now, In consideration of the premises, the said parties do hereby agree as follows, to-wit:
    1. The parties hereto shall, as soon as possible, cause to be organized a corporation to be called Gas Traction Foundry Company, under the laws of the State of Minnesota, and with its principal place of business in Minneapolis, with its articles of incorporation so prepared and drawn as to create it a purely manufacturing corporation. Said corporation shall have an authorized capital stock not to exceed One Hundred and Fifty Thousand Dollars ($150,000). A majority of the first board of directors of the corporation shall be named by the parties of the second part; and thereafter the election shall be governed by the vote of a majority of the stock.
    2. The party of the first part shall, as soon as possible after the signing of this agreement, cause to be erected in the City of Minneapolis, Minn., at some location to be agreed upon by the parties hereto, convenient to the factory of the party of the first part, a foundry the plans for which shall be approved by the parties of the second part, sufficient in size and capacity, to make all of the castings which may be required by the party of the first part in its business for many years to come, and to furnish facilities also for doing foundry work for other customers. The party of the first part also agrees to equip said foundry with all necessary tools, machinery, fixtures and appliances for carrying on properly the foundry business, which said foundry building, tools, fixtures and appliances, with the real estate upon which the same shall be located, shall not cost to exceed the sum of Twenty-five Thousand Dollars ($25,000). The party of the first part may, if it so desires, erect said foundry on a part of the real estate now owned by it in the City of Minneajiolis, Minn.; or such real estate as it may hereafter have purchased for the uses of its business; provided, that, if said real estate is so furnished by the party of tire first part, it shall be furnished at the fair valuation thereof, not to be less than One Thousand Dollars ($1,000) per lot of fifty (50) feet frontage on Fourth Street Southeast in Minneapolis, and not less than the price which the party of the first part shall be obliged to pay for any real estate hereafter acquired which may be used for the purpose.
    3. The party of the first part further agrees that it will after said foundry shall have been erected and equipped as aforesaid, convey to the said Gas Traction Foundry Company the said foundry, foundry site, tools, machinery, fixtures and appliances, and assign it all contracts which it may be able to secure for foundry work prior to such conveyance, in consideration of the sum of Fifty-five Thousand Dollars ($55,000), to be paid as follows, viz., Twenty-five Thousand Dollars ($25,000) in the paid up common capital stock of said corporation at par, and Thirty Thousand Dollars ($30,000) in the note of the grantee payable on or before ton (10) years after date with interest payable semi-annually at the rate of six (G) per cent per annum. Said note shall be secured by a first mortgage on the said foundry, foundry site, machinery, tools and fixtures. Said note shall provide that it may be paid by the mortgagee in multiples of Five Hundred Dollars ($500), said payments to- be made whenever the mortgagee or his assigns shall so elect. Of the remaining capital stock, Twenty-five Thousand Dollars ($25,000) thereof shall be issued as paid up capital stock to the said C. C. Gamm and Twenty-five thousand Dollars ($25,000) thereof as paid up capital stock to the said D. A. Potter. If the incorporators hereto shall decide to issue to the parties hereto at the time of incorporation any more than Seventy-five Thousand Dollars ($75,000) of stock, then one-third of all the stock so issued shall be issued to each of the three parties hereto. The said stock issued as aforesaid to the parties of the second part shall be received by them in full consideration for the good will which they may bring to the business of the corporation, and in consideration of their agreement which they hereby make, to devote their entire time and attention to the business of said foundry, to manage the same to the best of their ability, for a salary of High teen Hundred Dollars ($1,800) per year each and for no other compensation except the dividends which they shall receive from time to time upon their said capital stock, for the term of ten years after the commencement of the life of the corporation so to be formed.
    4 As a further consideration of the agreement of the parties hereto, as herein sot forth, the said parties do hereby agree that said corporation when formed, shall enter into a contract with said Gas Traction Company to furnish said Gas Traction Company all of the castings which said company may require for use in its business, at the actual cost price thereof, with five per cent (5%) added for profit; and that it will make for said Gas Traction Company all of its patterns and do all of its pattern work at the actual cost price thereof, with thirty-three and a third per cent (33%) added to the cost of productive labor entering into said patterns, to cover over-head charges; and that, while said foundry company shall be fully authorized to do a general contracting business in foundry and pattern work, the preference shall at all limes be given to the orders received from said party of tiie first part. In the cost of castings shall be included the proportionate amount of labor and also of all the heat, light and power used in the entire foundry. Settlements shall be made on the 10th of each month.
    5. In consideration of this agreement the parties’ of the second part do hereby agree that they will continue to furnish their services actively in said business as hereinabove set forth, during the term of ten (10) years, and such further extended term as shall be mutually agreed upon thereafter. And it is further agreed by the parties of the second part for themselves and for their executors, administrators and assigns, that if they, or either of them shall desire, for any reason, to sell or in any wise dispose of their stock in said corporation, they shall first oiler the same for purchase to the said Gas Traction Company and said Company shall have the right to purchase the same at the fair value thereof. If said parties can not agree upon such value, then such value shall be fixed by three appraisers, one of whom shall be named by the party of the first part, one by the parties of the second part, and the third shall be chosen by the parties so named.
    6. It is further agreed that the parties of the second part shall assume actively the business of Gas Traction Foundry Company on July 1st, 1910, and that the party of the first part shall use all reasonable efforts to have said foundry building built and equipped by that date. The conveyance of said foundry site and its equipment and the issuance of stock therefor shall be made as of July 1st, and the entire transfer shall take place as of that date.
    It is further agreed that on said July 1st, 1920, or as soon thereafter as the parties can arrange to meet for that purpose, the party of the first part will deliver possession of the foundry and foundry site and will turn over to the foundry company all orders which it can secure for foundry work prior to that date; and will pay into its treasury, as soon thereafter as may be needed, as working capital, an amount of money equal to the difference between Thirty Thousand Dollars ($30,000) and the cost of the foundry, foundry site and equipment.
    The petitioner was organized in accordance with the above agreement under the name of the Gas Traction Foundry Co. The Gas Traction Co., in accordance with the contract, erected and equipped a foundry, complete and ready for operation, which it turned over to the petitioner in consideration of $55,000, of which $25,000 was payable and was paid in common stock at par, and $30,000 was represented by a note payable on or before ten years after date, with interest payable semi-annually at the rate of 6 per cent.
    The stock was issued to Gamm and Potter in the amounts set out above in consideration of the benefit or advantage which they might bring to the business of the corporation on account of their personal skill, reputation, their agreement to devote their entire time and attention to the business and to manage the same for a salary of $1,800 a year each.
    After the organization of the petitioner corporation, it entered into a contract with the Gas Traction Co. whereby it was agreed that the petitioner would furnish to the Gas Traction Co. all of the castings which that company would require for use in its business at the actual cost price thereof with 5 per cent added for profit, and to make for the Gas Traction Co. all of its patterns and to do all of its pattern work at the actual cost price thereof with 33% per cent added to the cost of productive labor entering into said patterns to cover overhead charges.
    The petitioner was permitted by these contracts with the Gas Traction Co. to do a general contracting business in foundry and pattern work, but was required to give preference at all times to orders received from the Gas Traction Co.
    The following is a statement of the earnings, interest, and borrowed capital from the time of the organization of the petitioner corporation until October 31, 1915:

    In 1915 the petitioner repurchased its capital stock of the par value of $25,000 for $5,000 in cash.
   OPINION.

Teammell:

If, in exchange for its capital stock in 1910, the petitioner acquired good will of a definite cash value, then there should be included in the computation of its invested capital such good will at a value not to exceed $20,300, representing 25 per cent of the par value of the capital stock outstanding on March 3, 1911.

If the petitioner acquired any good will for stock at the time of its organization, it could only have acquired it from Gamm and Potter. It is not contended that it acquired any good will from any other source. Gamm and Potter had been employed by the Stickney Foundry Co. for several years. They decided to leave the company and establish a business of their own. Accordingly, they entered into the contract with the Gas Traction Foundry Co. set forth in the findings of fact, and a new corporation was organized which issued stock to Gamm and Potter. The only thing transferred by Gamm and Potter to the corporation was, in fact, their services. No going concern or established business was conveyed to the petitioner. The. knowledge, experience, skill and acquaintanceship of Gamm and Potter, which the corporation received the benefit of by virtue of their connection with the company, was undoubtedly of great benefit to the corporation, but we have held that this does not constitute good will. In the Appeal of Providence Mill Supply Co., 2 B. T. A. 791, we said:

Ability, skill, experience, acquaintanceship, or other personal characteristics or qualifications do not constitute good will as an item of property; nor do they exist in such form that they could be the subject of transfer.

We are, therefore, of the opinion that the petitioner did not acquire for stock at the time of its organization good will of any value.

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


author: Korner, Ohaii-man:

text:
    Mike George, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5774.
    Promulgated February 10, 1927.

      Mihe George pro se.

      A. R. Mam, Esq., for the respondent.
   Korner, Ohaii-man:

Proceeding for the redetermination of income-tax liability for the calendar year 1922. The deficiency and penalty for delinquency as determined by the Commissioner is $1,139.96.

FINDINGS OF FACT.

Petitioner is an individual engaged in the produce business at West Palm Beach, Fla. In the calendar year 1922 the petitioner realized net income from his produce business in the amount of $6,212. In the same year he engaged in certain real estate transactions in Florida and in Pawtucket, R. I., from which transactions he realized a net income of $4,295. The total net taxable income for the year from all sources was in the amount of $10,501.

Petitioner filed no tax return for the year 1922. Thereafter, the collector of internal revenue filed a return for the petitioner under the provisions of section 3176 of the Revised Statutes, as amended by section 1311 of the Revenue Act of 1921. In such return the statutory penalty of 25 per cent for delinquency was added, no reason for the failure to file the return having been shown.

Judgment will be entered on 15 days' notice, in accordance with Rule 50, including the 'addition of the statutory penalty for delinquency of %5 per cent of the amount of the tax.


author: MuRdooK :

text:
    Appeal of Fidelity Union Trust Co., Executor, Estate of Charlotte R. Butterworth.
    Docket No. 5433
    Promulgated February 10, 1927.
    The Commissioner was not in error when he reduced the amount of a deduction claimed under section 403(a)(2) of the Kevenue Act of 1921, for previously taxed property, by the amount allowed as a part of a deduction under section 403(a) (3) of the same Act for charitable bequests, where the petitioner has failed to show that the funds in the amount of the reduction derived from the sale by the decedent’s executor of a part of the previously .taxed property were not necessary to the payment of the charitable bequests under the will.

      Daniel L. Campbell, Esq., for the petitioner.

      J. C. Swayse, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in estate tax amounting to $557.81, arising out of a reduction by the Commissioner of a deduction claimed under section 403 (a) (2) of the Revenue Act of 1921. The reduction was based on the contention that part of the value of the property so deducted had already been allowed as a deduction under section 403(a) (3) of the Act.
    FINDINGS OF FACT.
    The petitioner, a New Jersey corporation, is the duly qualified executor of the estate of Charlotte R. Butterworth, who died January 22,1923, a resident of Summit, N. J. John F. Butterworth, her husband, died May 27, 1921, and the estate tax has been paid on behalf of his estate.
    That part of the will of Charlotte R. Butterworth, deceased, which is pertinent hereto, is as follows:
    First: I direct the payment of all my just debts, funeral and testamentary expenses as soon as convenient after my decease.
    Second :, I give and bequeath to my sisters, Anna B. Duryee, Mary O. Duryee and Amy O. Duryee, or such of them as survive me, all my jewelry, wearing apparel, household goods and household furnishings.
    Third: I give and bequeath (a) to my faithful housekeeper, Margaret Leonard, the sum of Five Hundred Dollars; and (b) to my faithful former housekeeper, Maria McOlaury, the sum of Two Hundred and Fifty Dollars.
    Fourth : I give and bequeath to the Bishop of the Diocese of Newark, New Jersey, all my theological books for use in the Diocese or in Missionary Districts.
    Fifth : I give, devise and bequeath to my sisters, Anna B. Duryee, Mary O. Duryee and Amy O. Duryee, or such of them as survive me, my house and lot known as No. Cl de Forest Avenue, Summit, New Jersey.
    Sixth : I give and bequeath to the Overlook Hospital at Summit, New Jersey, and to the hospital of this Diocese, “ St. Barnabas Hospital, Newark, New Jersey,” each the sum of Fifteen Thousand Dollars, with which to endow a bed in each hospital — one bed to be known as the “ John F. Butter-worth Memorial,” and the other as the “ Charlotte R. Butterworth Memorial.”
    Seventh: I give and bequeath to George F. Butterworth and Helen A. Butterworth, brother and sister of my late husband, John F. Butterworth, such amount as I may receive from the estate of my said husband, less Fifteen Thousand Dollars given to one of the aforesaid hospitals, share and share alike.
    Eighth: Should my said brother-in-law, George F. Butterworth, predecease me, then and in that event I give the share that he would have received had he survived, to his issue per stirpes. Should said Helen A. Butterworth predecease me, then and in that event I give and bequeath the amount she would have received had she survived, to George F. Butterworth, or if he be dead to his issue per stirpes.
    Ninth : I direct my executors hereinafter named, or the survivors or survivor of them, to convert the remainder of my estate, both real and personal, into money, and to distribute the same among my brother, sisters, and the issue of my decease[d] brothers in the same manner as if I had died intestate thereto.
    The gross estate of Charlotte E. Butterworth, deceased, amounted to $190,416.06, of which $56,436.12 represented property which she had received under the will of her husband, which had formed a part of his gross estate situate in the United States, and which was in the form of securities and had been found intact in a separate safe deposit box in the Summit Trust Co. of Summit, N. J., marked “ Estate of John F. Butterworth.”
    The petitioner kept these securities separate from the other assets of the decedent, Charlotte E. Butterworth, and sold certain of them for $15,239 in cash. It transferred the remainder of these in kind to George F. Butterworth and Helen A. Butterworth, and in addition paid them in cash $239, the excess over $15,000 realized from the above sale.
    The proceeds of the sale were mingled with other funds of the decedent which had been realized from the sale of other securities. From these funds were paid the two legacies of $15,000 each to the hospitals mentioned in paragraph “ Sixth ” of the will.
    All of the devises and legacies were paid and the transfers required by the will were made.
    Charges against the estate amounting to $9,101.83 were paid. No part of the property received from the estate of the husband was used to pay these charges. The petitioner claimed the following deductions under section 403 (a) of the Eevenue Act of 1921:
    1. Charges against estate_ $9, 701. 83
    2. Property identified as taxed within five years_ 56,436.12
    3. Charitable bequests_ 30, 000. 00
    4. Exemption for resident decedents- 50, 000. 00
    Total. 146,137. 95

      The Commissioner allowed all of these deductions as claimed, except the one for property identified as taxed within five years, which he reduced to $25,007.27. At the hearing he admitted that this figure should be increased in the amount of $14,761, but contended that $15,239 of the deduction claimed by the petitioner had already been allowed as a deduction under charitable bequests, inasmuch as the petitioner had failed to prove the contrary.
   OPINION.

MuRdooK :

Section 403 (a) (2) of the Revenue Act of 1921 is as follows:

Sec. 403. That for the purpose of the tax the value of the not estate shall he determined—
(a) In the case of a resident, by deducting from the value of the gross estate—
*******
(2) An amount equal to the value of any property forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent whore such property can be identified as having been received by the decedent from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received: Provided, That this deduction shall be allowed only where an estate tax under this or any prior Act of Congress was paid by or on behalf of the estate of such prior decedent, and only in the amount of the value placed by the Commissioner on such property in determining the value of the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent’s gross estate and not deducted under paragraphs (1) or (3) of subdivision (a) of this section. This deduction shall be made in case of the estates of all decedents who have died since September 8, 1916.

The Commissioner, in his calculation of the deduction to be allowed under the above portion of the Act, had authority to limit that deduction to the amount of the value placed by the Commissioner on such property in determining the value of the gross estate of such prior decedent, and to the extent that the value of such property was included in the decedent’s gross estate. In other words, the value of such previously taxed property for the purpose of determining the deduction can not be greater than the amount at which it was included in the decedent’s gross estate and can not be greater than the amount at which it was valued in determining the gross estate of the prior decedent, but should be as large as the lesser of the two amounts above mentioned.

The respondent admits by the pleadings that the value of this property was included in the gross estate of the decedent to the extent of $56,436.12. Tet, in the calculation of the deficiency, it is apparent that the value of $55,007.27 was used, and, as is indicated in his brief, this figure was used because it represented the value of the previously taxed property as of the date of the decedent’s death. It is apparent, therefore, that some mistake has been made which must be corrected under Rule 50; either the gross estate of this decedent should be reduced in the ‘amount of $1,428.85, or the deductions under section 403(a) (2) of the Revenue Act of 1921, as allowed by the Commissioner in the determination of the deficiency, should be increased in the amount of $1,428.85.

Section 401 of the Revenue Act of 1921 imposes a tax equal to a percentage of the value of the net estate (determined as provided in section 403) upon the transfer of the net estate of this decedent. Section 403 provides that the value of the net estate shall be determined in the case of a resident by making certain deductions from the gross estate. We are concerned only with the question of an alleged double deduction which the Commissioner claims is contrary to a portion of the proviso in section 403 (a) (2), “ Provided, That this deduction shall be allowed * * * only to the extent that the value of such property is * * * not deducted under paragraphs (1) or (3) of subdivision (a) of this section.” Paragraph (1) allows a deduction of administration expenses and certain other charges and losses, and paragraph (3) allows a deduction of charitable bequests or devises and certain other devises and bequests of a similar nature.

The Commissioner admits that “ the value of such property ” was not deducted under paragraph (1), and that the deduction of $9,701.83 was proper, but claims that .to the extent of $15,239 “ the value of such property ” was deducted under paragraph (3) and he therefore has reduced the deduction under paragraph (2) in that amount.

We are convinced that the excess of $239 realized from the sale of the securities from the husband’s previously taxed estate was turned over to the husband’s brother and sister to pay the balance of the bequest under paragraph “ Seventh ” of the will, that no part of it was used to pay the bequest under paragraph “ Sixth ” of the will, and that no part of the value of it was deducted under section 403(a)(3). Therefore the deductions under section 403(a)(2) as allowed by the Commissioner should be further increased by this amount. .

But we are unable to say from the record that the full amount of the $15,000 realized from the sale of securities from the estate of the husband was not required to pay one of the $15,000 legacies to the hospitals, because we do not know how much of the gross estate represented the value of property disposed of in the specific devise and specific legacies under paragraphs “ Second,” “ Fourth,” and “ Fifth ” of the will.

Paragraph “ Second ” of the will was what is termed a specific bequest or legacy, and could only be satisfied by the petitioner delivering the specific things therein individualized and mentioned to the persons named. Paragraphs “Fourth” and “Fifth” were similar and could only be satisfied in the same way. We know that of the decedent’s gross estate about $134,000 represents the value of property other than that received from her husband’s estate. But we do not know the value of decedent’s jewelry, wearing apparel, household goods and household furnishings, of her theological books, and of her house and lot, known as No. 61 de Forest Ave., Summit, N. J., all of which she specifically disposed of in her will. Suppose that those items had a value of $119,000. Then only $15,000 would have been available from her own property to pay a part of the $30,000 bequeathed to the two hospitals and it would have been necessary to use the $15,000 realized from the sale of the husband’s securities to complete the payment of the $30,000 just mentioned. If it had been absolutely necessary to use $15,000 realized from the sale of the husband’s securities to pay one-half of the charitable bequests, we can not say that the Commissioner was in error when he reduced the total deductions claimed under section 403(a) (2) by $15,000, for the reason that he had already allowed a deduction represented by this $15,000 in the deductions for charity under section 403(a) (3), since, to the extent of $15,000, the value of such previously taxed property was thus deducted under paragraph (3) of subdivision (a) of this section.

We can see no distinction between this case and the case of a decedent whose gross estate was $115,000, consisting of a house and lot worth $100,000, and securities worth $15,000, the latter received from her husband, whose estate had been taxed within five years, where the decedent by her will devised her house and lot to her sister and gave $15,000 to charity, and then claimed a deduction of $15,000 as a charitable bequest under section 403(a)(3) and $15,000 as a deduction on account of previously taxed property under section 403(a)(2), and which latter claimed deduction we would deny for the reason that it was a double deduction and represented value of previously taxed property already deducted under paragraph (3) of section 403(a).

It may well be that the items listed above to which we have given an assumed value of $119,000 were worth much less and that, instead of a fund of $15,000, there was a fund of $80,000 or $90,000 available from her own property to pay the charitable bequests, but we have no proof of the real facts in this particular, and consequently we must approve the Commissioner’s determination in regard to the item of $15,000.

The corrected deductions are, therefore:

1. Charges against estate-$9, 701. 83
2. Property identified as taxed within live years- 41, 436.12
Or (to be determined under Rule 50)- 40,007.27
3. Charitable bequests_ 30, 000. 00
4. Exemption for resident decedents_ 50, 000.00

We are not attempting to decide what the proper deductions under this section would be had it been shown that there was money or property of the decedent available to pay this bequest to charity, exclusive of any money received from the estate of the prior decedent, and exclusive of any property required to satisfy the specific bequests under the will'.

It is not unlikely that we would have had this situation before us had we been given the real facts in this case. But, due to faulty pleadings or a failure of proof, we are unable to find any facts save those set out above.

The pertinent part of the petition is as follows:

In paragraph 5 we find:

The facts upon which the taxpayer relies as the basis of its appeal are as follows:
The gross estate of Charlotte R. Butterworth amounted to over One Hundred and Ninety Thousand Dollars of which amount, Fifty-six Thousand Four Hundred Thirty-six Dollars and Twelve Cents represented what she received under the will of her husband who predeceased her and whose estate was (axed within five years previous to her death and the amount so received by her was, therefore, exempt under (he law.
The total debts and expenses of (he administration of her óslate were less than Nine Thousand Dollars and it is evident there was ample estate of her own in the residuary thereof to pay said debts and administration expenses and, further, to satisfy all specific legacies and devises and leave a considerable residuary. (Italics ours.)

The answer “ admits the facts alleged therein (except the amount of debts and administration expenses which is $9,701.83 instead of less than $9,000 as alleged * * *).”

In the first place an argumentative phrase, “ it is evident,” is used instead of a straightforward and unqualified allegation, “ there was.” Overlooking this point, we next note that the term residuary ” is twice used in the same sentence referring to two quite different things, neither of which is the residuary estate of the decedent in the sense that that term refers to the residue after the payment and satisfaction of all legacies and devises, specific, demonstrative, and general. The first time the petitioner used the term it apparently referred to that part of the gross estate of the wife, exclusive of any property received from the estate of the husband, before the deduction of her debts, expenses, legacies and devises of all kinds. The second time it used the term it apparently referred to that part of her gross estate, exclusive of any property received from the estate of the husband, after all debts, administration expenses, and specific legacies and devises had been deducted, but "before any demonstrative or general devises or legacies, if any, had been deducted. Admitting the petitioner’s allegation, but not knowing the amount or value of this fund or part of her estate, we are unable to say whether or not it was sufficient to pay the general bequests made in the “ Third ” and “ Seventh ” paragraphs of the will and also to pay more than $15,000 of the $30,000 bequeathed to the two hospitals.

There was no testimony in regard to this point, the return is not in evidence, the deficiency letter does not clarify the situation, we know nothing of what transpires in the Bureau of Internal Revenue in regard to any case, and there is nothing else to relieve the petitioner from the failure of proof caused by its own loose, inaccurate, uncertain, and confusing pleading.

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


author: ARUndeld :

text:
    John Henry, Petitioner, v. Commissioner of Internal Revenue Respondent.
    Docket No. 6375.
    Promulgated February 10, 1927.

    1. On the evidence held that liusband and wife were domiciled in the State of Washington during the taxable year.
    2. Under the statutes of Washington a wife has a vested interest in community property, and where the husband reported one-half of the income from community property as taxable to'him the Commissioner is precluded by sectiou 1212 of the Revenue Act of 1026 from taxing the whole of such income to the husband.

      RálfJi W. Smith, Esg., for the petitioner.

      George E. Adams, Esg., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1923 in the amount of $1,429.69. The questions for decision are whether the petitioner was domiciled in California or Washington during the year 1923 and whether the income from community property acquired while residing in the latter State was correctly reported by dividing such income between petitioner and his wife. The entire deficiency arises from the action of the Commissioner in increasing petitioner’s income by the amount theretofore reported by his wife.

      FINDINGS OF FACT.
    The petitioner is an individual and during the calendar year 1923 resided in California. He resided in the State of Washington from April, 1901, to August 21, 1921. On the latter date he and his wife went to California for the primary purpose of visiting relatives. They have ever since remained in the latter State and since August, 1922, the petitioner has engaged in business there. At the time of leaving the State of Washington the petitioner owned certain property there, including a residence occupied by himself and his family. He still retains all of that property.
    Since leaving the State of Washington the petitioner and his wife have always intended to return. The petitioner has never voted in any local, State, or presidential election in the State of California.
    The petitioner and his wife were married in Seattle, Wash., in 1902. At that time neither of them possessed any property and since then neither has acquired any property by gift or devise. The property owned in 1923, and from which income was received, was acquired by the joint efforts of petitioner and his wife during coverture and while both resided in and were domiciled in the State of Washington.
    For the calendar year 1923 the petitioner and his wife filed separate returns. In the petitioner’s return he reported the income from his business in California as his separate income, and reported one-half the income from property acquired while residing in Washington on the ground that such income was income from community property. The petitioner’s return was filed with the collector of internal revenue for the sixth district of California.
   OPINION.

ARUndeld :

-The evidence satisfies us that the petitioner’s domicile was in the State of Washington during the calendar year 1923. When the petitioner went to California he had no intention of remaining, and during and prior to the period here involved he had not abandoned his intention of returning to Washington. The general rule as to loss of domicile at one place and the acquisition at another is stated in 9 E. C. L. 542, as follows:

Tile general rule is that domicil is changed from one place to another, or one state to another, only by the abandonment by a person of his first place of domicil with the intention not to return, and by taking up his residence in another place with the intention of permanently residing in that place.

The rule is stated in 19 C. J. 401, as follows:

Domicile of choice is entirely a question of residence and intention, or, as it is usually put, of factum and animus. Both must concur in order that the domicile may be deemed established.

All of the property which was the source of the income here involved was acquired while petitioner and his wife were domiciled in the State of Washington. A part of it was personal property and part real property located in that State. In this situation the respective rights of the spouses in this case in both their real and personal property must be determined in the light of the laws of Washington.

It seems clear that there is a presumption arising under the laws of the State of Washington that all property acquired by either spouse during coverture is community property. Hill v. Gardner, 35 Wash. 529; 77 Pac. 808, and cases there cited, and the more recent case of Parker v. Parker, 121 Wash. 24; 207 Pac. 1062. No evidence has been introduced to rebut this presumption. As the petitioner and his wife were domiciled in the State of Washington during the taxable year and the income in question was from property acquired during coverture and while both were residents of and domiciled in that State, our inquiry is limited to the question of whether the action of the petitioner in dividing the income from such property between himself and his wife for income-tax purposes is permitted under the revenue acts.

The pertinent section of the Revenue Act is section 1212 of the Revenue Act of 1926, which reads as follows:

Income for any period before January 1, 1925, of a marital community in tbe income of which the wife has a vested interest as distinguished from an expectancy, shall be held to be correctly returned if returned by the spouse to whom the income belonged under the State law applicable to such marital community for such period. Any spouse who elected so to return such income shall not be entitled to any credit or refund on the ground that such income should have been returned by the other spouse.

The decision depends, therefore, upon whether under the laws of Washington the wife has a vested interest in the community income.

The statutes of Washington (Remington’s Comp. Stats., 1922), after defining what constitutes the separate property of the husband (section 6890), and the separate property of the wife (section 6891), provide as follows:

§6892. [5917.] Community Property Defined — Husband’s Control of .Personalty. Property, not acquired or owned as prescribed in the next two preceding sections, acquired after marriage by either husband or wife, or both, is community property. The husband shall have the management and control of community personal property, with a like power of disposition, as he has of lixs separate personal property, except lie sliall not devise by will more than one-balf thereof.
§6893. [5918.] Community Realty, Conveyance of, etc. The husband has the management and control of the community real property, but he shall not sell, convey, or encumber the community real estate, unless the wife join with him in executing the deed or other instrument of conveyance by which the real estate is sold, conveyed, or encumbered, and such deed or other instrument of conveyance must be acknowledged by him and his wife: Provided, however, that all such community real estate shall be subject to the liens of mechanics and others for labor and materials furnished in erecting structures and improvements thereon as provided by law in other cases, to liens of judgments recovered for community debts, and to sale on execution issued thereon.

In an early case, Holyoke v. Jackson, 3 Wash. Ter. 235; 3 Pac. 841, it is said of the marital community that—

In it, the proprietary interests of husband and wife are equal, * * *. Management and disposition may be vested in either one or both of the members. If in one, then that one is not thereby made the holder of larger proprietary rights than the other, but is clothed in addition to his or her proprietary rights, with a bare power in trust for the community.

The case of Marston v. Rue, 92 Wash. 129; 159 Pac. 111, was a suit by the husband to recover an automobile which had been sold by the wife. After sustaining the finding of the lower court that the automobile was community property, the court in its opinion said:

Now, a wife’s rights in family personalty are not of the contingent sort, like dower or survivorship, but a present estate. True, by our statute the husband is made manager, with full power to sell and dispose of this. But it does not follow that he can give it away. He is, so to speak, only the head of a firm. The personal property is just as much hers as his. * * * Her property right in it is as great as his.

The case of Schramm v. Steele, 97 Wash. 309; 166 Pac. 634, 637, describes the rights of husband and wife in community personal property as follows :

To hold that the whole substance of the term “ Community property ” as applied to personalty consists in a mere contingent expectancy of the wife would make of the term “ community personal property ” a palpable misnomer. It would take away every community element except the fact that the wife’s labors and sacrifices had helped to earn it. It would destroy that equality which it is the obvious purpose of our community property law to conserve. These considerations make it plain that the statute, in conferring upon the husband the management and control of the community property, though giving him the absolute power of disposition of community personalty, intends no more than to make him the statutory agent of the community. Marston v. Rue, 92 Wash. 129, 159 Pac. 111.

That part of the decision in Schramm v. Steele, supra, holding the husband to be no more than a statutory agent of the community, is followed in Parker v. Parker, 121 Wash. 24; 207 Pac. 1062, and Stevens v. Naches State Bank, 136 Wash. 137; 238 Pac. 918, 920.

These decisions of the Washington courts indicate a recognition in that State of a rule of property under which the wife’s interest in community property is regarded as a present vested right. This being so, and the petitioner having returned the community income for 1923 as being taxable to him only upon his one-half thereof, the Commissioner, in view of section 1212 of the Revenue Act of 1926, may not now tax the whole of such income to the husband.

No issue is raised as to the income from the petitioner’s business enterprise in California which he reported as his own income, and we express no opinion as to the correctness of the method of reporting that income.

Judgment will be entered for the 'petitioner.


author: Lansdon :

text:
    Gilbert W. Lee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1408.
    Promulgated February 18, 1927.
    1. In the circumstances of this proceeding, income resulting from sales of real estate should be computed on the installment basis.
    2. Overassessments in the circumstances pleaded herein are not subject to review by the Board.

      II. A. Mihills, O. P. A., for the petitioner.

      J. D. Foley, Esq., for the respondent.
    The Commissioner asserts the deficiencies here in question for the years 1918 and 1920 in the respective amounts of $9,817.20 and $4,973.91, and overassessments for the years 1917 and 1919 in the respective amounts of $157.31 and $22,280.65. The issues to be determined are (1) whether income resulting from the sale of subdivision real estate is to be determined by the use of the completed transaction or installment sales method, and (2) whether certain losses were sustained in 1917 or at some prior date. A third issue as to whether certain dividends received in 1917 were subject to tax at 1916 or 1917 rates was abandoned at the hearing.
    FINDINGS OF FACT.
    The petitioner is an individual residing in Detroit. His principal business is the conduct of a wholesale grocery company, but he is also largely interested in banking, automobile manufacturing, and real estate operations. He keeps his books and makes his income-tax returns on the cash receipts and disbursements basis.

      In the years • 1914 and 1915 the petitioner acquired two acreage tracts of real estate in Detroit known as the Gilbert and Grand River Park subdivisions. He subdivided these tracts into lots, all of which he sold prior to December 31, 1916. All sales were made on contracts that called for an initial cash payment of 10 per cent of the purchase price and 1 per cent monthly thereafter, monthly payments to include accrued interest. In making his income-tax returns during the terms of these sales contracts the petitioner sometimes used the completed transaction and at other times the installment basis. Upon audit of the petitioner’s income-tax returns, the Commissioner held that all the income resulting from the sale of lots in the two subdivisions should be reported on the installment basis. The profits on such sales made in 1916 were $10,945.06 and $69,627.79, or a total of $80,572.85, which was income taxable in 1916 if the completed transaction basis of reporting profits is employed. Profits from installments collected during the years 1917 to 1920, both inclusive, were: 1917, $6,205.11; 1918, $3,783.95; 1919, $8,244.17; 1920, $7,887.37.
    Prior to March 1, 1913, petitioner purchased 1,082 shares of the common stock and 550 shares of the preferred stock of the Lozier Motor Car Co. at $100 per share. The March 1, 1913, value of the common stock was $27 per share and of the preferred stock, $90 per share. On September 23, 1914, the Detroit Trust Co. was appointed receiver in bankruptcy for the Lozier Motor Car Co. and thereafter made trustee in bankruptcy. As receiver the trust company reported that the books of the car company showed total assets of $4,899,-972.65, but found that, on the basis of a going concern, the total value of such assets was $2,069,718.50. The total liabilities aj>pear-ing on the car company’s books were $3,214,414.88. Later the receiver appraised the assets, other than land and buildings, for liquidation purposes at $1,366,584.46. The total common stock of the car company outstanding was $2,000,000. The total preferred stock was $1,494,700.
    The assets of the company were advertised for sale and on February 4, 1915, were sold at auction for $1,000,000. The sale was confirmed by the court in bankruptcy. Under the terms of the sale it was left optional with the purchaser as to whether he should take the lands and buildings. If he decided not to take them, he was to be allowed a deduction of $350,000 on the purchase price. On September 28, 1915, he exercised his option by taking the real estate, and a contract was entered into providing that payments of $75,000 should be made on the plant property on February 15, 1916, 1917, 1918, and 1919, and a payment of $50,000 on or before February 15,1920. The terms of sale of the personalty required that all payments be made within one year from February 15, 1915. The contract provided that the entire price should immediately become due in the event that the property should pass into the hands of a third party.
    On June 9,1917, the referee in bankruptcy entered an order closing the estate and discharging the trustee. The total amount received and disbursed to the creditors of the company was slightly less than 30 per cent of the proved debts, leaving a little more than 70 per cent unpaid. The stockholders received nothing.
   OPINION.

Lansdon :

The Commissioner advised the petitioner of deficiencies for the years 1918 and 1920, and of overassessments for the years 1917 and 1919. There is nothing in the record, either in the way of evidence adduced by the petitioner or admissions by the Commissioner, that indicates the basis for the overassessments or that they were made in circumstances that would justify us in redetermining tax liability for the years in which they were found. We hold, therefore, that our only function here is to redetermine the petitioner’s tax liability for the years 1918 and 1920, as to which the Commissioner has asserted deficiencies in the amounts set forth supra. Appeal of W. H. Morefield, 4 B. T. A. 394; Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The sale contracts of lots in the two tracts of land subdivided by the petitioner provided for an initial cash payment of 10 per cent of the purchase price and 1 per cent monthly payments, including interest, thereafter, until the entire purchase price debt should be discharged. The petitioner contends that he received no taxable income until his receipts from payments exceeded the cost of the land and that he had the option to report such income either on the installment basis or after complete recoupment of his capital investment. This may be true, but the so-called completed transaction basis is another recognized method for reporting income from transactions of the nature here involved; The effect of the first method would be to distribute the taxable income derived from such sales over all the years that elapsed before the final payment was made on the last lot that was sold. The second method would postpone the return of any part of the receipts from sales as income until all capital expenditures were replaced.' If the accrual or completed transaction method is used the entire profit was taxable income in 1916 or prior years;

In his original income-tax returns for several of the years in question the petitioner computed his taxable income from the sale of lots by what he calls the percentage method. The evidence indicates that such computation was in effect the use of the installment basis. It is apparent, therefore, that the petitioner elected to return the income resulting from the sale of lots on the instalhnent basis. This choice must have been considered and doubtless was made because it was deemed to best serve the interests of the petitioner. Having once made his election, the petitioner should not be allowed to change to a different basis merely because subsequent legislation or other events made it to his interest so to do.. We are of the opinion that the petitioner’s income from the sale of lots, in the circumstances set forth in our findings of fact, should be computed, reported, and taxed on the installment basis.

The petitioner contends that he sustained a loss on the stock of the Lozier Motor Car Co. in the year 1917, and asks for the deduction of such loss from his gross income for that year. Since no deficiency is asserted for the year 1917, we are of the opinion, as set forth supra, that we have no authority to redetermine tax liability of the petitioner for that year, and therefore make no decision either as to the fact or date of the alleged loss.

Judgment will be entered for the respondent on 10 days’ notice, wider Rule 50.


text:
    National Farmers Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8199.
    Promulgated February 18, 1927.
    The Commissioner’s disallowance of deductions for alleged worthless debts approved.

      John 0. Loeffler, Esq., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes for 1919 and 1920, in the amounts of $497.69 and $1,474.88, respectively.
    Only that part of the deficiencies is involved which results from the action of the respondent in disallowing deductions claimed on account of certain debts alleged to have been ascertained to be worthless.
    FINDINGS OP PACT.
    The petitioner is a corporation chartered under the National Banking Laws, with its principal office at Kasson, Minn.
    In February, 1918, the petitioner, having some surplus funds on hand, was seeking investments. It was discovered that the Security State Bank of Knox, North Dakota, had certain notes which purported to be secured by chattel mortgages. One D. N. Ugland, his wife, and his mother were the directors of that bank. Arrangements were made between the two banks through Ugland, representing the Security State. Bank of Knox, . and through Park-hurst, representing the petitioner, whereby the petitioner purchased the notes and chattel mortgages for the amount of $10,781.71, which was their face value. The notes were endorsed by the Security State Bank of Knox, without recourse. Contemporaneously with the assignment or endorsement of said notes to petitioner, Ugland, his wife, and his mother, as directors of the Security State Bank of Knox, entered into a guaranty agreement wherein they, as individuals, guaranteed the payment of these notes upon maturity. Parkhurst, representing the petitioner, made no investigation with* respect to the makers of the respective notes and of the chattel mortgages, but relied entirely upon the written guaranty of the said Ugland, his wife, and his mother. At that time Ugland was considered to be worth in the neighborhood of $400,000 or $500,000, with liabilities greatly less than that amount, and his personal guarantee was considered good security for the payment of the notes.
    In or about the month of July, 1918, the petitioner learned through Parkhurst that Ugland had forged all of the notes and chattel mortgages, had forged many other similar notes and mortgages, and had received money therefrom from others.
    The petitioner, upon ascertaining that the notes and mortgages were forged and realizing that there might be some delay in the collection on the written guaranty, desired to have the matter adjusted without calling it to the attention of the stockholders, of whom there were a large number owning small quantities of stock, and in order to avoid any complaint upon the part of the bank examiners in connection with holding this claim against Ugland, his wife, and his mother on its books, arrangements were made between Parkhurst, who was president of the petitioner bank, and the board of directors, whereby Parkhurst agreed to pay to the bank the face amount of the notes, viz, $10,781.71, in consideration of the assignment to him of the claim of the petitioner bank against the guarantors of the notes. The claim against the guarantors, in so far as the bank was concerned, was thus converted into cash.
    Under the arrangement, however, it was agreed that Parkhurst should file the claim that he had received from the bank and undertake the collection thereof. Meantime, on the discovery of the forgeries, Ugland consented to the appointment of a receiver, and a voluntary receiver was afterwards appointed by the Circuit Court in Fargo. It was agreed that in the event Parkhurst failed to recover from Ugland the amount he had paid to the bank, the difference was to be paid to him by the bank, and it was also agreed at that time that Parkhurst’s salary was to be increased from $3,000 to $5,000 per annum, which was to be paid to him pro rata through the year, with further sums by way of commissions on the sale of real estate and insurance commissions, which additional compensation and commissions were to be paid by the petitioner to Parkhurst until it was definitely determined what the amount of the loss, if any, with respect to the notes and written guaranty would be. As dividends were paid to Parkhurst by the receiver of Ugland, the liability of the petitioner bank to Parkhurst was reduced proportionately.
    Parkhurst filed his claim with the receiver, which was allowed in fuil.
    In 1919 the petitioner paid to Parkhurst $1,999.92 by way of additional compensation in compliance with this agreement. In 1920 Parkhurst received the sum of $9,242.92, of which $1,999.92 was by way of additional compensation, $2,015.74 was a dividend from the receiver of Ugland, and the balance was on account of commissions under his agreement with the bank.
    When the receiver Avas appointed for Ugland, it was considered that there would be ample assets to pay the amount of the notes which were a valid claim against Ugland on account of his guaranty. However, as time went on other claims were filed against Ugland so that the total amount of claims aggregated something in excess of $375,000. At the time of the appointment of the receiver the claims aggregated approximately $100,000. By the end of 1920 various developments occurred. Among other things, a tract of land which was considered to be clear of encumbrances was found to have mortgages against it. The mortgages which appeared against the land appeared of record to be satisfied, but it developed that the satisfactions were forged. It was also discovered that other notes which were considered to be assets of Ugland and which came into the possession of the receiver were found to be forged. A drought occurred in the territory in which Ugland-’s land was situated, which materially reduced the chances of realization of cash from it.
    It was not definitely known at the end of 1920 just what amount would be realized by the receiver out of Ugland’s assets. It was known, however, that there would not be enough realized to pay the claims in full, and from all the facts known it was considered that only a small part would be recovered. The receiver did not liquidate Ugland’s assets until after 1920.
   OPINION.

Trammell:

The petitioner claimed deductions in 1919 and 1920 with respect to the notes, as set forth in the findings of fact, as debts ascertained to be worthless and charged off. In our opinion, the loss sustained by the petitioner, if any, was not on account of debts ascertained to be worthless. The petitioner actually received the cash for the notes from Parkhurst and assigned the notes to him. The losses sustained by the petitioner, if any, were represented by the payments made by the petitioner under its agreement with Park-hurst to reimburse him for any loss on account of the notes. During 1919 the petitioner paid to Parkhurst by way of increased salary, for the purpose of reimbursing him, $1,999.92. During this period there was no ascertainment of loss. It appeared then that the assets in the hands of the receiver would probably be sufficient to pay the entire amount. During 1920 the petitioner paid to Parkhurst the amount stated in the foregoing findings of fact, in accordance with its agreement with him, but at that time it was not definitely known what the loss would be, if any. The receiver had assets which wore sufficient to pay a portion of the claim, but what portion it was not known.

The guaranty which was assigned to Parkhurst by the bank was the joint obligation of Ugland, his wife, and his mother, who were directors of the Security State Bank of Fargo. There was no testimony as to what the assets and liabilities of Ugland’s wife and mother were. They were clearly liable on the guaranty agreement with Ugland, and even if we should find as a fact that Ugland had no assets out of which he could make good his guaranty, we could not find as a fact that the guaranty was worthless in the absence of any evidence as to the financial responsibility of the other guarantors.

In view of the evidence we must hold that the petitioner did not sustain a deductible loss in 1919 or 1920. When it paid out the additional compensation which was in fact a part payment under its agreement with Parkhurst, it was considered by both Parkhurst and the petitioner that the guaranty agreement of Ugland and the other directors of the Security State Bank would be sufficient to protect the petitioner or Parkhurst from any loss, and it was not definitely known whether such guaranty was sufficient at the end of 1920, during which year other payments were made by the petitioner.

Judgment will he entered for the respondent.


author: MoRRis:

text:
    Julian Yriarte, Petitioner, v. Commissioner of Internal Revenue, Respondent. Felix Yriarte, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 5990, 7605.
    Promulgated February 18, 1927.

      Theodore B. Benson, Esq., for the petitioners.

      George G. Witter, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income tax for 1921 of $1,824.71 against Julian Yriarte and $2,389.11 against Felix Yriarte. The question involved is the value in 1915 of certain real estate inherited by the petitioners in that year and sold in the taxable year in question.
    FINDINGS OF FACT.
    Julian Yriarte is a resident of Whittier, Calif., and Felix Yriarte, of Brea, Calif. In 1915 the petitioners inherited 30.07 and 32.81 acres of land, respectively, in or around Brea, Calif. The land was sold in 1921 at an average sale price of $914.36 per acre. The Commissioner valued the land as of the date of inheritance at $175 per acre. The fair market value of said land as of that date was $175 per acre.
   OPINION.

MoRRis:

The valuation of $175 per acre placed upon the land in question by the Commissioner, is based upon an appraisal of the clear market value of said property made for state inheritance-tax purposes by three disinterested persons appointed by the Superior Court of Orange County, Calif., and approved by that court, and presumably the value upon which that tax was paid. This appraisal ivas made at about the time the petitioners acquired the property. A certified copy of the inventoiy and appraisal as filed in the probate records of Orange County was offered in evidence by the Commissioner and received Avithout objection. The testimony of the petitioners’ three Avitnesses, taken by deposition, is in our opinion entitled to little Aveight on their qualifications and basis of valuation presented, and insufficient to shift the scales in the petitioners’ favor. One witness was the superintendent of a refining company who invested his saAnngs in Brea real estate. He valued the property in question, as of 1915, at $800 an acre. The second witness ivas a locomotive engineer Avho went to Brea in 1915, or a little before, and has lived there part of the time since. He made no purchases or sales of similar property and his valuation of from $G00 to $800 ail acre was based on the price at which the property was listed with him. The other witness was an oil worker who bought and sold some property for himself but did not sell or know of any sales of land near the tract in question. He placed a 1915 value upon it of $800 an acre. The evidence submitted by the petitioner does not convince us that the Commissioner’s determination of value was erroneous.

Judgment will ~be entered for the respondent.