text:
    Wirt Franklin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9266.
    Promulgated July 13, 1927.
    1. Where the Commissioner and the taxpayer, pursuant to the statute, have entered into a consent in writing to the determination, assessment and collection of a tax after the time otherwise prescribed by law for such determination, assessment and collection, such consent is an extension of the statutory period, bilateral in character.
    2. Where such a consent is indefinite in duration, the true intent • of the parties is to be. ascertained. Rules laid down by the courts in the case of contracts which are similarly indefinite for determining such intent are applicable. Where the Commissioner gave notice that such consent would expire at a certain time,' held that in the absence of other factors, such as an estoppel against the taxpayer, the Commissioner may not determine, assess, or collect the tax after the date fixed by him for the termination of the consent.
    3. Such a consent was executed by petitioner on January 16, 1923, and by the Commissioner on February 19, 1923. On April 11, 1923, the Commissioner announced that all such consents would expire April 1, 1924. On September 28, 1923, the Commissioner assessed the tax in controversy. On October 14, 1923, petitioner filed claim ior abatement. On September 22, 1925, the Commissioner rejected such claim for abatement. Held, that collection of such tax is barred.

      Frank H. Bryan, Esq., for the petitioner.

      A. G. Bouchard, Esq., for the respondent.
    This case involves a deficiency in tax for the calendar year 1917, in the amount of $8,509.71. Such amount was assessed on September 28,1923, and a claim for abatement of the same was filed. The claim for abatement ivas rejected by the Commissioner. The issues are (1) whether the Commissioner erred in disallowing as a deduction, depletion in the amount of $5,981.91, and (2) whether the collection of the alleged deficiency of $8,509.71 is barred by the statute of limitations. With respect to the first issue, it was stipulated by the respective counsel for the parties that the depletion allowance should be $6,608.97, instead of $6-,204.44, as allowed, and that the net income as computed by the respondent should be reduced by the amount of $404.53.
    FINDINGS OF FACT.
    The taxpayer filed his tax return for the year 1917 on April 1. 1918, showing a tax liability of $80, and filed an amended return for said year on April 29, 1918, showing a tax liability of $19,035.15. On September 28, 1923, the Commissioner assessed an additional tax for 1917 against the taxpayer of $8,509.71. On October 14, 1923, the taxpayer filed with the collector a claim for abatement of such tax in the amount of $8,509.71, covering the additional tax so assessed. On September 22, 1925, the Commissioner mailed to the petitioner a letter stating that the claim for abatement in said amount of $8,509.71 had been rejected, and that the rejection would officially appear on the next schedule to be approved by the Commissioner. The taxpayer filed a bond to stay the collection of the alleged deficiency with the collector of internal revenue at Oklahoma City during December, 1925.
    On December 17, 1926, the collector of internal revenue at Oklahoma City ■ filed, in the office of the County Clerk of Oklahoma County, a lien against the property of the taxpayer in accordance with section 3186 of the Revised Statutes of the United States. No suit has ever been filed in the United States District Court for the Eastern District of the State of Oklahoma by the United States or by the collector of internal revenue for the collection district of Oklahoma against the taxpayer for the collection of any income tax for the calendar year 1917. The taxpayer resides in the City of Ardmore, Carter County, Okla., which is within the jurisdiction of said district court.
    In accordance with the provisions of section 250(d) of the Revenue Act of 1921, the taxpayer and the Commissioner signed the following consent:
    Jan. 16-1923
    Income and Profits-Tax Waiver
    In pursuance of the provisions of subdivision (d) of section 260 of the Revenue Act of 1921 Wirt Franklin of Ardmore, Oklahoma, and the Commissioner of Interna] Revenue, hereby consent to the determination, assessment, and collection of the amount of income, excess profits, or war profits taxes due under any return made by or on behalf of the said individual for the year 1917, under the Revenue Act of 1921 or under prior income, excess profits, or war profits tax acts or under section 38 of the Act entitled “An Act to provide Revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” approved August 6, 1909, irrespective of any period of limitations.
    Wirt Franklin, Taxpayer.

    D. H. Blair, Commissioner.

    Feb. 19-1923.
    The Commissioner issued publicly on April 11, 1923, Mimeograph 3085, which reads as follows:
    Treasury Department,
    Office of the Commissioned of Internal Revenue,

      Washington, D. C., April 11, IMS.

      To Colleotors of internal revenue, internal reverme agents in charge, and others concerned:

    The form of waiver now in use extends the time in which assessments of 1917 income and excess-profits taxes may be made to one year from the date of signing by the taxpayer. Inasmuch as there are many waivers on file signed by the taxpayers containing no limitation as to the time in which assessments for 1917 may be made, all such unlimited waivers will be held to expire April 1, 1924.
    D. H. Blair, Commissioner.

   OPINION.

Phillips :

The sole question presented is whether collection of the deficiency is barred by the statute of limitations. The return of the petitioner was filed on April 1, 1918, and, except for the extension of time, the statute would have run on assessment and collection of the tax on April 1, 1923. Prior to that date the parties executed the document set forth in the findings, whereby the petitioner consented to the determination, assessment, and collection of taxes due for 1917 irrespective of any period of limitation.

The Revenue Act of 1921, under which the consent was executed, provided that the amount of any such taxes should “ be determined and assessed within five years after the return was filed, unless both the Commissioner and taxpayer consent in writing to a later determination, assessment, and collection of the tax.” It was further provided that no suit or proceeding for the collection of any such taxes should be begun after the expiration of five years after the date when the return was filed. The consent here under consideration provided no definite period within which the determination, assessment and collection were to be made. On April 11, 1923, the Commissioner publicly issued a formal announcement to the effect that waivers for the 1917 taxes containing no limitation as to. the time in which assessments might be made, would be held to expire April 1, 1924. The deficiency here in question was assessed within such period, on September 28, 1923, but the tax has not been collected, for immediately" after the assessment a claim for abatement was filed and it was not until two years thereafter, September 22, 1925, that the petitioner was notified of the rejection of such claim. In the meantime no effort was made to collect the tax. It is the petitioner’s contention that the term of the consent expired on April 1, 1924, and that thereafter no collection of the tax might be made, while the respondent contends that the consent continued in full force and effect.

The instrument under consideration is denominated an “ income and profits-tax waiver.” It is in fact a bilateral undertaking entered into by the parties pursuant to the statute. Technically, it is not a waiver of the statute, for it is made pursuant to the statute. It is not an acknowledgment of any existing obligation or a new promise to pay, from which a new cause of action arises, thus beginning anew the period of limitation. It is not an agreement not to plead the statute of limitations as a defense to any asserted tax liability. In short, it is not something to be considered as in avoidance of the statute. By the statute and by its terms, it operates to extend the time.

The statute provides that in the case of such a consent as we have here, the tax is to be determined, assessed and collected at any time prior to the expiration of the period agreed upon. The consent of the parties is indefinite as to the period within which these acts may be done but it is not to be assumed that it was their intention that there never should be any limitation. In such cases, rather than hold agreements which contain similar provisions void for indefiniteness, courts attempt to arrive at the intent of the parties. Occasionally the courts have construed agreements containing such indefinite terms as terminable at the will of either party, but the more generally accepted construction is either (1) that the contract must be performed within .a reasonable time, or (2) that it continues until terminated by either party upon reasonable notice. And where a reasonable time is allowed, the- party who is first to perform the conditions of the contract may, by act, deed or otherwise, fix a limitation beyond which he may not extend the time for performance and upon which the other party to the contract may rely. (See Williston on Contracts, sec. 68, et seq., and cases cited.) We see no reason why the rules laid down by the courts for the purpose of determining the intent of the parties in such cases are not equally applicable to a “ consent in writing ” such as we have here. It was recognized by this Board in the Appeal of Warner Sugar Refining Co., 4 B. T. A. 5, where, having under consideration an instrument which in terms was a waiver of all statutory limitations, the Board said:

No notice was ever served upon the Commissioner by the taxpayer prior to the assessment of the amount here in controversy as to when it would regard the provisions of the waiver as having been fully complied with by both parties and become inoperative.

Here the Commissioner, having given notice that all waivers then on file, containing no limitation as to the time in which assessments for 1917. might be made, would be held to expire on April 1, 1924, fixed the expiration date of this consent by his own act. Any taxpayer who considered the period so long as to be unreasonable might have attempted to shorten the period by notice to the Commissioner or otherwise, but was not required to do so and was entitled to rely upon the act of the Commissioner.

Although it may have no significance, it is interesting to note that the Commissioner’s notice was issued shortly after Congress, on March 4, 1923, had amended section 252 of the Revenue Act of 1921 to provide that when a taxpayer filed a waiver of his right to have taxes for 1917 determined and assessed within five years, credit or refund should be allowed if claim therefor was filed within six years from the time when the return was due. In the case of a taxpayer filing no such waiver, only five years was allowed, indicating that it was the intention of Congress that such waivers should extend the statute in behalf of taxpayers for one year. The action of the Commissioner in limiting such waivers to approximately one year in behalf of the Government is in line with this action on the part of Congress.

It should be noted that in the present case the tax was assessed on September 28,1923, and a claim in abatement was filed on October 14, 1923. This left several months in which to collect the tax, either with or without passing upon the claim for abatement. No further consent in writing was entered into and no action was taken for two years. There is no claim that the petitioner further extended the time for collection, either in writing or otherwise, or that he has acted in such a manner as to estop him from claiming the benefits of the statute. If there had been no public announcement by the Commissioner fixing the time for which the agreement would remain in effect, we are nevertheless of the opinion that no action was taken within a reasonable time and collection of the tax would be barred.

The provisions of the Kevenue Acts of 1924 and 1926 with respect to collection have no application where the statutory period for collection expired prior to the date of their enactment into law. We therefore conclude that collection of the tax is barred.

Reviewed by the Board.

Decision will be entered for the 'petitioner.


source: Caselaw Access Project

author: Littleton :

license: Public Domain

text:
    American Steel Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8368.
    Promulgated July 13, 1927.
    1. The cash value of promissory notes paid in to a Pennsylvania corporation for stock held to constitute invested capital.
    2. Invested capital should not be reduced by the amount of an alleged tax for a prior year which tax the Board held did not exist.
    3. Affiliation status granted for certain periods.
    4. Where two corporations are affiliated for a portion of 1918 and for 1919 and 1920, and a net loss is sustained by the group for 1919, no part of such net loss may be carried forward to 1920, under the provisions of section 204, Kevenue Act of 1918, where the net income of the group for the fractional period in 1918 is in excess of the net loss of the group for 1919.

      J. W. Drye, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits tax for 1920 in the amount of $46,296.35. The notice of deficiency showed an overassessment for 1919, which year will be co^icTere^ in so far as necessary to a determination of the deficiency The questions involved are (1) whether certain promiss(^‘'|i<k^s paid in for stock on. June 1, 1918, constituted invested-ca^|^í°ifjr the year 1920; (2) whether invested capital-for_Í920-.should..be reduced by the amount of a deficiency for the year 1918^which. Board heretofore held did not exist; (3)y$ieí,¡xerr Me*'"84" the American Cotter Pin Co. affiliated group is entitled against its income for Í920. 0 .
    By agreement between the parties’, ^Sie1 America i? Co, was made a party to this proceeding.

      FINDINGS OF FACT.
    The American Steel Co. (hereinafter referred to as the Steel Company), is a Pennsylvania corporation with its principal office and place of business at Pittsburgh.
    The facts relating to the first issue, namely, whether promissory notes in the amount of $1,367,958.02 paid in for stock on June 1,1918, constituted invested capital of the American Steel Co. for the year 1920 have heretofore been considered by the Board and are fully set forth in the findings of fact in the Ap-pedl of American Steel Go., 1 B. T. A. 839. The facts found by the Board in that appeal with reference to this issue are made a part of these findings of fact as fully as if set forth in detail herein. The conditions existing in 1920 with reference to these jiromissory notes were identical with those existing in 1918.
    The American Cotter Pin Co. (hereinafter referred to as the Cotter Pin Co.), since dissolved, was, in 1920, a Pennsylvania corporation which had been in existence under the laws of Pennsylvania since 1913. Its sole business was the manufacture of cotter pins. Its original issue of capital stock was 500 shares of the par lvalue of $100 each. No change was made in the stock issued and outstanding until July 8,1918, when 500 additional shares were issued, the authorized capital having been increased in the meantime from $50,000 to $250,000, all shares being of one class and having a par value of $100 each. On September 16, 1918, 500 additional shares were issued, making the total shares issued and outstanding 1,500, which condition remained throughout 1920.
    The following table shows the stockholders of record from January 1, 1918, to December 31, 1920:

    The 237 shares transferred of record from R. A. Whiteside to the Steel Company on June 16, 1920, were actually acquired from R. A. Whiteside on March 22, 1920. There were no further changes in the ownership of the stock from June 16,1920, to December 31, 1920.
    The common stock holdings of the Steel Company were as follows:

    No change occurred in the stockholdings of the Steel Company throughout 1920. J. P. Kelly is a brother of M. B. Kelly and J. A. McCrory was an employee of both companies. K. A. Whiteside, who held stock in the Cotter Pin Co., was the inventor of a cotter-pin patent and the stock which was issued to him was issued for this patent. He was not an officer in either company, though prior to 1920 he devoted a part of his time to the sales end of the Cotter Pin Co., and in the beginning furnished the customers for cotter pins. The operation and management of both companies were dominated by M. B. Kelly.
    The officers of the Steel Company and the Cotter Pin Co. from January 1, 1919, to December 31, 1920, were as follows:
    American Steel Co.: American Cotter Pin Co.:
    M. B. Kelly, president. M. B. Kelly, president.
    J. P. Kelly, treasurer. J. P. Kelly, treasurer.
    J. A. McCrory, secretary. J. A. McCrory, secretary.
    The Steel Company manufactured wire and wire procloucts. Its purpose* and that of its officers in organizing the Cotter Pin Co. and acquiring control of its stock was to add a by-product to the products manufactured by the Steel Company. It was contemplated that this by-product would increase the output of the Steel Company, aid it in the development and extension of its business, create a greater tonnage, and reduce its overhead.
    Prom the outset, the business of the Cotter Pin Co. was not profitable. From time to time the Steel Company advanced it money and in a large way financed its operations. The additional issues of stock of the Cotter Pin Co. in 1918 from 500 to 1,500 shares were to take up loans made by the Steel Company, or its stockholders, to the Cotter Pin Co.
    Both companies were conducted as a single business or enterprise from the same office in the Park Building, Pittsburgh, Pa. The office routine was handled by the same office force and sales were made through the same channels. The products of both companies were manufactured in Ellwood City, Pa. In the beginning, cotter pins were manufactured in the tool room of the Steel Company and the work was done by the Steel Company’s employees. Later on, the cotter pin manufacture was moved to a building adjacent to the buildings occupied by the Steel Company, but in the same plant. The building in which the cotter pins were manufactured was owned at all times, however, by M. B. Kelly or the Steel Company- The Cotter Pin Co. at no time had title to it. Many of the plant employees exercised the same duties with respect to both companies. The salaries of office and plant employees serving both companies were arbitrarily apportioned between the two companies.
    The Cotter Pin Co. purchased from the Steel Company as much of the wire used in the manufacture of cotter pins as the Steel Company could furnish. Purchases from outside parties were only made when the demand could not be supplied by the Steel Company. In 1919, these purchases from the Steel Company amounted to 47 per cent of the total purchases made by the Cotter Pin Company, and in 1920, 97 per cent.
    The Cotter Pin Co. suffered operating losses as follows:
    1918_$5, 336. 63
    1919_49, 868. 52
    1920 from January 1 to March 22_ 6,156.85
    The taxable income of the Steel Company for 1918, 1919, and 1920 was as follows, the operations of the Cotter Pin Co. being included therein from March 22, 1920, to December 31, 1920:
    1918_$262,312.79
    1919_ 27,281. 64
    1920_ 284, 340. 59
   OPINION.

Littleton :

The errors assigned in the petition are as follows:

(1) The failure of the Commissioner to allow as a part of invested capital for ■ 1920, promissory notes paid in for stock on June 1, 1918, in the amount of $1,307,953.02.
(2) The action ’of the Commissioner' in reducing invested capital for 1920 by the amount of the deficiency in tax of the petitioner for 1918 which was disallowed by the Board for that year, but which decision has not been acquiesced in by the Commissioner.
(3) The failure of the Commissioner to recognize an affiliated status of the American Steel Co. and the American Cotter Pin Co. for 1919 and 1920.
(4) The failure of the Commissioner to give effect to the net loss of the aforementioned companies on an affiliated basis for 1919 in determining their taxable income for 1920.
(5) The failure of the Commissioner to allow a loss of $2,600 in 1920 on account of scrapping an engine in that year and also a loss in the same year on account of dismantling certain annealing furnaces.

At the hearing, the petitioner withdrew its assignments of error set out in subdivision (5) above.

The point at issue with respect to the inclusion in invested capital in 1920 of notes paid in for stock in 1918 is identical with that considered by the Board in the case of this petitioner for 1918. Appeal of American Steel Co., 1 B. T. A. 839. The petitioner submitted in evidence in this proceeding the findings of fact of the Board in the aforementioned proceeding, and also the evidence as disclosed by the record in the prior proceeding with respect to this point. Evidence was further submitted to show that the conditions existing in 1920 were identical with those existing in 1918 with respect to these notes. No evidence was presented by the Commissioner on this point. Parish-Watson & Co., 4 B. T. A. 605; Union Metal Manufacturing Co., 4 B. T. A. 287; Goodell-Pratt Co., 6 B. T. A. 1235.

The Board heretofore decided in the Appeal of American Steel Co., supra, that the promissory notes paid in for stock on June 1, 1918, had an actual cash value at that time of $1,367,935.02 and constituted. invested capital in that amount from the date paid in. During the year 1920, these promissory notes were assets of the corporation in a like amount and should, therefore, be included in invested capital for the year 1920 at their face value.

As to the second question, we find that the Commissioner is seeking to reduce invested capital of the petitioner in 1920 by the deficiency which the Board disallowed in 1918. Since we have held that such a deficiency does not exist, it would be erroneous to allow the reduction of invested capital on account thereof. The contention of the petitioner with respect to this issue is, therefore, sustained.

The third issue relates to the affiliated status of the Steel Company and the Cotter Pin Co. for 1920. Since the succeeding issue involves the application of the net loss provisions of section 204 of the Revenue Act of 1918, and since the determination of the amount of the net loss deductible for 1920 involves a consideration of 1918 and 1919 for both companies, it becomes necessary to take jurisdiction of these years for the sole purpose of determining the amount of the net loss deductible by the Steel Company in 1920. The authority for thus taking jurisdiction is conferred by section 274 (g) of the Revenue Act of 1926, which reads as follows:

The Board in redetermining a deficiency in respect of any taxable year shall consider such facts with relation to the taxes for other taxable years as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid.

The first question to be considered is whether the two companies were affiliated under the provisions of section 240 (b) of the Revenue Act of 1918, which reads as follows:

For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

An examination of the evidence with respect to stockholders shows that on September 16, 1918, M. B. Kelly held 1,181 shares and J. P. Kelly, 82 shares out of a total of 1,500, or approximately 84 per cent, and that the remainder was held by Whiteside. This situation continued, substantially, until August 15, 1919, and September 3, 1919, when on these respective dates the stock of M. B. Kelly and J. P. Kelly was transferred to the Steel Company, except in each instance for one qualifying share. On March 22, 1920, all of Whiteside’s stock was acquired by the Steel Company, which thus became practically the 100 per cent owner of the stock of the Cotter Pin Co., and so remained at least until December 31, 1920.

We are convinced from the evidence that M. B. Kelly and J. P. Kelly, his brother, who were practically 100 per cent owners of the Steel Company, were acting as nominees of the Steel Company in holding the stock of the Cotter Pin Co. This company was formed for the purpose of being an integral part of the Steel Company and to add a by-product to the products manufactured by the Steel Company. While it was ostensibly a separate corporation, it was operated as a branch of the Steel Company.

From the beginning the Cotter Pin Co. was fostered by the Steel Company and its principal stockholder, M. B. Kelly. The business of both companies was conducted from the same general office. The office routine was handled by the same force and sales were made through the same channels. The products of both companies were manufactured in the same general plant, and the buildings occupied by the Cotter Pin Co. were owned by the Steel Company and M. B. Kelly, the principal stockholder of the Steel Company. The principal officers of the two companies were identical, and at no time did Whiteside, the owner of the minority interest prior to March 22, 1920, hold an executive office in either company. In many respects employees in one plant performed similar duties in the other plant and salaries were arbitrarily allocated between the two companies.

In fact, the very existence of the Cotter Pin Co. was dependent on the Steel Company. Since the former company did not prove profitable the latter company advanced money to meet the operating needs of the former. This money was not repaid except through the issuance of additional stock by the* Cotter Pin Co., which stock was of doubtful value. Had Whiteside opposed the Steel Company in its policies, he would have lost everything, since the Cotter Pin Co. had lost money from the beginning and its indebtedness to the Steel Company made it dependent oii the Steel Company.

The extent of domination exercised and tbe oneness of the two companies is shown by the testimony of M. B. Kelly in these words:

I was doing everything for the American Steel Co. You see I owned the American Steel Co. practically, and I owned the Cotter Pin, practically, and these were matters of record, hut I was the boss of the whole shooting match. I did everything I wanted to, and I told these fellows how to vote.

In view of the foregoing circumstances, the Board is of the opinion that from September 16, 1918, the conditions contemplated by the statute for affiliation have been met and the two companies should be ruled affiliated from that date to December 31, 1920.

In the Appeal of Mahoning Coal R. R. Co., 4 B. T. A. 923, the Board said:

Control need not be legal control, but community of interest may, if recognized and acted upon, constitute sufficient basis to determine the question of control.
* * * * ‡ * *
If the statute means that affiliation results from a condition of stock ownership and control, such as enables one person, or one group of persons, to control practically all the voting stock, whether that control arises from actual ownership, or such community of interest as to place practically all of the voting stock subject to disposal in stockholders’ meetings by that single, dominating unit, we believe the conditions contemplated by the statute have been met..

Likewise in the Appeal of Brandeis Investment Co., 3 B. T. A. 1086

The entire circumstances disclosed by the record show that the'realty company was the child of the store company, conceived for its purposes, developed for its convenience, and dominated by its necessities. While it is true that there are stockholders in the investment company who hold no stock in the store company, yet the store company and its closely knit stockholders own over 80 per cent of the stock in the investment company, and three other stockholders, who are dependent for their income on the earnings of the store company, own over 6 per cent.

The final question is whether the petitioner is entitled to a deduction in 1920 under the provisions of section 204(b), Revenue Act of 1918, which is as follows:

If for any taxable year beginning after October 81, 1918, and ending prior to January 1, 1920, it aj)pears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the ■ •amount of such net loss shall under regulations prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; and the taxes imposed by this title and by Title III for such preceding taxable year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the pirovisions of section 252. If such net loss is in excess of the net income for such preceding taxable year, the amount of such excess shall under regulations prescribed by the Commissioner with the approval of the Secretary be allowed as “a deduction in computing the net income for the succeeding taxable year.

We have heretofore held in this decision that the Steel Company and the Cotter Pin Co. were affiliated for 1919 and a portion of 1918. The income must, therefore, be determined on a consolidated basis in so far as the companies were affiliated, and when the companies are so considered there is disclosed a net loss for the consolidated group for 1919 of $22,576.88.

The statute provides that this net loss shall first be applied against the preceding taxable year- — here 1918. In this instance, the two companies were in existence for the whole of 1918, but we have held that they were affiliated from September 16, 1918. Therefore, under the principle laid down in the Appeal of American La Dentelle, Inc., 1 B. T. A. 575, a consolidated return should have been filed by the two companies from this date until December 31,1918.

The income of the Steel Company for 1918 was $262,312.79, and the Cotter Pin Co. suffered a loss for 1918 of $5,336.63. By considering that the income and loss accrued ratably over the year 1918, and there is no evidence to the contrary, we find an income on a consolidated basis from September 16, 1918, to December 31, 1918, of approximately $75,176.73, or an amount in excess of the net loss previously determined for the calendar year 1919 on a consolidated basis.

The Board is of the opinion that a proper application of the net loss provisions to the situation here in question is first to apply the entire net loss to the income of the consolidated group for the period for which the two companies are held to have been affiliated in 1918, viz., September 16, 1918, to December 31, 1918. Since the net income for this period is in excess of the net loss for the group in 1919, there is no net loss to be otherwise disposed of, and, consequently, no net loss to be considered as a deduction for the group in 1920. Appeal of Norfolk Knitting Mills Corporation, 5 B. T. A. 792.

Reviewed by the Board.

Judgment will be entered on 10 days’ notice, v/nder Rule 50.


text:
    Old Colony Trust Co., and Cornelius A. Wood, Executors of the Will of William M. Wood, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6508.
    Promulgated July 13, 1927.
    The amount of State and Federal income tax paid by a corporation upon the income of its president, was income to him in the year in which paid.

      James Craig Peacock, Esq., and Arthwr A. Badlcmtine, Esq., for the petitioners.

      Arthur H. Murray, Esq., for the respondent.

      The Commissioner determined a deficiency in income tax against William M. Wood, in the amount of $854/181.93 for the calendar year 1919, and $350,837.14 for the calendar year 1920. The executors of his estate claim that these deficiencies are erroneous in so far as they relate to the holding of the Commissioner that the amount of State and Federal income tax paid by the American Woolen Co. upon a certain portion of Wood’s income for the years 1918 and 1919 constituted income to him in the year in which paid by the corporation. The facts are found as stipulated.
    FINDINGS OF FACT.
    William M. Wood was, prior to his death, an inhabitant of Massachusetts, and was such inhabitant during 1919 and 1920, the taxable tvars here involved.
    The returns of William M. Wood for the years 1918 to 1920, inclusive, were made to the collector of internal revenue at Boston, Mass. During 1918, 1919, and 1920 and at the time the returns of income for those years ivere made, William M. Wood was president of the American Woolen Co. After his death his will was duty approved and allowed in the probate court in the County of Essex, at Lawrence, in the Commonwealth of Massachusetts, and the Old Colony Trust Co. of Boston, Mass., and Cornelius A. Wood were duly appointed by said court and qualified and are now acting as the executors of said will.
    In 1918 William M. Wood received as salary and commissions from the American Woolen Co. the amount of $978,725, which amount was included in his original return of income for 1918. In 1919 he received as salary and commissions from the American Woolen Co. the amount of $548,132.87, which amount was included in his original Federal return of income for 1919. In his individual returns for 1918 and 1919 there were included other substantial items of income, the Federal income and surtaxes upon which were paid by William M. Wood out of his own personal funds in the manner hereinafter indicated. The 1918 and 1919 individual returns of Wood were made under the direction and supervision of Wheaton Kittredge, Esq. During 1919 and 1920 Kittredge was an officer and a director of the American Woolen Co.
    On August 3,1916, the board of directors of the American Woolen Co. duty adopted the following resolution, which was in effect during the years 1919 and 1920 :
    Voted, That this Company pay any and all income taxes, State and Federal, that may hereafter become due and payable upon the salaries of all the officers of the Company, including the President, William M. Wood; the Comptroller, Parry C. AViggin; the Auditor, George R. Lawton, and the following members of the staff, to witPrank IT. Carpenter, Edwin L. Heath, Samuel R. Haines and William M. Lasbury; — to the end that said persons and officers shall receive their salaries or other compensation in full without deduction on account of income taxes, State or Federal, which taxes are to be paid out of the treasury of this corporation.
    The above resolution was amended by the board of directors of the American Woolen Co. at its meeting held on March 25, 1918, as follows:
    Voted, That, referring to the vote passed by this Board on August 3, 1916, in reference to income taxes, State and Federal, payable upon the salaries or compensation of the officers and certain employees of this Company, the method of computing said taxes shall be as follows, viz:
    The difference between what the total amount of his tax would be, including his income from all sources, and the amount of his tax when computed upon his income excluding such compensation or salaries paid by this Company.
    Pursuant to the provisions of the resolutions quoted above, the American Woolen Co. paid personal Federal income and surtaxes for its president, William M. Wood, now deceased, by reason of salary and commissions paid to him by such company as follows:
    Taxes for 1918 paid in 1919_$681,169.88
    Taxes .for 1919 paid in 1920_ 351,179. 27
    William M. Wood did not include these amounts, or any part thereof, in his returns of income for the years 1919 and 1920. His books were kept and his returns made on the cash receipts and disbursements basis. In the Commissioner’s final determination, the amount of $681,169.88 was included in the petitioner’s 1919 income and the amount of $351,179.27 was included in taxpayer’s 1920 income.
    The Federal income and surtaxes upon the salary and commissions, mentioned above, were paid by the American Woolen Co. in 1919 and 1920 by bank cashier’s checks or drafts, made payable to the order of the collector of internal revenue for the Massachusetts district. The balance of the Federal income and surtaxes shown by the 1918 and 1919 individual returns of William M. Wood to be due were paid by his personal checks or by cashier’s checks or drafts purchased by him, drawn to the order of the collector of internal revenue. The checks and drafts purchased by the American Woolen Co. and made payable to the collector of internal revenue and the checks or drafts drawn by or purchased by William Wood were given to Wheaton Kittredge, Esq., mentioned above, who delivered all of such checks and drafts to the collector of internal revenue for the Massachusetts district.
    The 1918 tax on the salary and commissions of William M. Wood, paid in 1919 by the American Woolen Co., was in four payments and entered on the books of the company, as follows:

      Journal F. 46 Mar. 31, 1919 (In accordance with vote of Directors, August 3, 1916) :•
    General Expenses_$130, 000. 00
    Cash___$130,000.00
    Journal F. 77 June 30, 1919 (Taxes ,W. M. W. — with interest.
    See vote of Directors on August. 3, 1916) :
    General Expenses_$175, 584.94
    Cash_$175,584.94
    Journal F. 106 Sept. 30, 1919 (See Vote of Directors, Aug. 3, 1916) :
    General Expenses_$187,792.47
    Gash_$187,792.47
    Journal F. 129 Dec. 31, 1919 (Employees’ Taxes. See vote of Directors on August 3, 1916) :
    General Expenses_$187, 792.47
    Gash-$187,792.47
    Total payments-$681,169. 88
    In its original return of income for the year 1919, which showed, a net taxable income of $16,861,239.67, the American Woolen Co. claimed as a deduction the amount of $681,169.88, mentioned above; the item was included in “ General Expenses,” Item No. 12 of the 1919 return.
    The 1919 tax paid in 1920 by the American Woolen Co. on the salary and commissions of William M. Wood was entered on the books of the company as follows :
    1920
    Apr. 30 J. 179 General Expenses (A/c Vote of Directors)_ $87,794.82
    June 30 191 “ “ Collector of Internal Revenue— vote of Directors August 3, 1916_ 87,794. 82
    Sept. 30 J. 215 “ “ Employees’ Taxes — Vote of Directors August 3, 1916_ 87, 794.82
    Dec. 31 241 “ “ Employees’ Taxes — Vote of Directors, August 3, 1916_ 87, 794. 82
    To Gash_,_$351,179. 37
    The above entries appearing in the journal of the American Woolen Co. were carried into the general expense account in the ledger of the company and closed into profit and loss and the books closed for the year on that basis.
    The amount of $353,179.37 mentioned above, paid on the salary of William M. Wood in 1920, was not claimed as a deduction in the 1920 original income-tax return of the American Woolen Co., which return showed a net loss of $3,852,086.64; the $351,179.37 appeared in Schedule “ L ” of the 1920 corporation return as an unallowable deduction, it being part of the amount of $14,814.81 and set forth in that schedule as “ Employees’ Tax in lieu of Salary.”
   OPINION.

Littleton :

On the authority of the opinion of the Board in Providence & Worcester R. R. Co., 5 B. T. A. 1186, the action of the Commissioner in holding that the amount of tax paid by the American Woolen Co. upon the petitioner’s income was taxable income to him in the year in which paid is approved.

Reviewed by the Board.

Judgment will ~be entered for the respondent.


author: Phillips :

text:
    Appeal of Cunningham Sheep & Land Co.
    Docket No. 5071.
    Promulgated July 13, 1927.
    1. Section 1100(b) of the Revenue Act of 1924 continues the. Revenue Act of 1921 in force for the assessment and collection of all taxes imposed by such Act or prior Acts. A consent extending the time for assessment and collection of taxes, executed pursuant to the Revenue Act of 1921, continues in force after the date of enactment of the Revenue Act of 1924.
    2. Pursuant to the Revenue Act of 1921, limiting the time within which taxes may be determined, assessed, and collected, and providing that the taxpayer and the Commissioner may consent in writing to a later determination, assessment and collection, such consent in writing was executed providing that such determination, assessment and collection might be made irrespective of any period of limitations. Helé, that such consent is not void for in-deíiniteness. Helé, further, that such consent grants a reasonable time in which such act may be performed.
    3. In the circumstances of the present appeal, helé, that the determination and assessment were made within a reasonable time.
    4. An announcement by the Commissioner that such consents in writing, then on file with him, would expire on a certain date, has no application to such consents executed at a subsequent date.

      Osear G. Pogge, Esg., for the petitioner.

      Thomas P. Dudley, Jr’., Esg., for the Commissioner.
    The taxpayer appeals from the determination by the Commissioner of deficiencies in income and profits taxes for the years 1909 to 1918, inclusive. The appeal is based upon two grounds, one upon the merits and the other being a plea that the assessment of such taxes is barred by reason of the expiration of the period of limitation provided by law. Upon motion of the parties it was ordered that the plea in bar be heard and determined in advance of a hearing upon the issue involving the merits.

      The petitioner filed returns of its income for the years 1916 to 1920, inclusive, as follows:

    Under date of February 27, 1923, the petitioner and the Commissioner entered into the following consent in writing to a later determination, assessment and collection of the tax due under the return filed for the year 1917:
    In pursuance of the provisions of subdivision (d) of section 250 of the Revenue Act of 1921, Cunnincham Sheep and Land Company of Pilot Rock, Oregon, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income,- excess-profits, or war-profits taxes due under any return made by or on behalf of the said Cunningham Sheep and Land Company for the years 1917 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax acts, or under Section 38 of the Act entitled “An Act to provide Revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” approved August 5, 1909, irrespective of any period of limitations.
    This waiver to be in effect for one year from the date of the signing hereof.
    [CORPORATE SEAL] CUNNINGHAM SHEEP AND LAND COMPANY
    (Signed) Mary M. Burgess, Vice-President.

    (Signed) Ralph N. Burgess, Secretary.

    (Signed) D. H. Blair, Commissioner.

    Under date of September 1, 1923, the petitioner and the Commissioner entered into the following consent in writing to a later determination, assessment and collection of, the taxes due under any returns filed for the years 1909 to 1920, inclusive:
    In pursuance of the provisions of subdivision (d) of section 250 of the Revenue Act of 1921, Cunningham Sheep and Land Company of Pilot Rock, Oríegon, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Cunningham Sheep and Land Company for the years 1909 to 1920, inclusive, under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 30 of the act entitled “An Act to provide Revenue, equalize duties and encourage the industries- of the United States, and for other purposes,” approved August 5, 1909, irrespective of any period of limitations.
    Corporate Seal.
    Cunningham Sheep and Land Company.
    Cunningham Sheep and Land Company
    (Signed) Mary M. Burgess, Vice-President.

    (Signed) Ralph N. Burgess, Secretary.

    (Signed) D. H. Blair, Commissioner.

    On or about April 11, 1923, the Commissioner of Internal Revenue issued and published a ruling reading as follows:
    Treasury Department,
    Office of Commissioner of Internal Revenue,

      Washington, D. C., April 11, IMS.

      To Collectors of Internal Revmvue, Internal Revenue Agents in Charge and others concerned:

    The form of waiver now in use extends the time in which assessments of 1917 income and excess-profits taxes may be made to one year from the date of signing by the taxpayer. Inasmuch as there are many waivers on file signed by taxpayers containing no limitation as to the time in which assessments for 1917 may be made, all such unlimited waivers will be held to expire Ax>rii 1, 1924.
    D. H. Blair, Commissioner.

    By letter dated April 25, 1925, the Commissioner finally determined deficiencies and overassessments for the years from 1909 to 1920, inclusive, as follows:

    It does not appear whether or not the overassessments are the result of the denial of claims for abatement of additional assessments.
    From such determination the petitioner appealed to this Board.
   OPINION.

Phillips :

The petition purports to relate to the determination by the Commissioner of deficiencies for the years 1909 to 1918, inclusive. The Board has no jurisdiction of determinations of deficiencies in tax arising under acts prior to the Revenue Act of 1916. Section 283, Revenue Act of 1926. The proceeding will therefore be dismissed so far as it relates to the years 1909 to 1915, inclusive.

Upon the basis of the facts set out above we are asked to determine that assessments of the deficiencies herein questioned are barred. We are concerned principally with the effect to be given to the consent dated September 1, 1923. Counsel for the petitioner advances several arguments in support of his position that the statute has run on assessment. In the first instance, he contends that the consent was made expressly in pursuance of the provisions of subdivision (d) of section 250 of the Revenue Act of 1921, that such Act was repealed by the Revenue Act of 1924 and that, if such consentís to be effective after the passage of the 1924 Act, the instrument must be such as is required under that Act. It does not appear that the repeal provisions of the 1924 Act are as broad as counsel contends. The provisions of subdivision (b) of section 1100 appear sufficient to save any rights which existed under the 1921 Act for the assessment and collection of taxes due under that and previous revenue acts. But if we are mistaken in this view,'we ai’e nevertheless of the opinion that the consent which is here involved w'as sufficient to meet the requirements of the 1924 Act.

It is there provided-in section 278(c) as follows:

Where both the Commissioner and the taxpayer have consented in writing to the assessment of the tax after the time prescribed in section 2TT for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon.

The position of counsel is that the consent of September 1, 1923, is'indefinite in time and is therefore of no effect under the Act, which, it is said by counsel, contemplated an intention that the consent should contain a statement of a “ particular period ” during which the assessment might be made. In our opinion the Act does not have the effect of making void such consents as we are here considering. While a consent fixing a definite date for the expiration of the period in which assessment might be made may be desirable to remove uncertainty, there is nothing in the statute which requires that the expiration of the period be related to a definite date.

The courts are frequently confronted • with contracts which fail to fix the period within which they are to- be performed. Courts are reluctant to declare any contract void for uncertainty if the intent of the parties can be determined. In those cases where the uncertainty relates to the time of performance of the contract, the courts have found little difficulty in arriving at the conclusion that a reasonable time is to be allowed. There are some variations of this rule, one of which permits one of the parties in certain circumstances to give notice to the other of the time within which performance should be made, reasonable notice being given. It appears to us that the rules laid down by the courts for construction of such agreements are properly to be applied to the consent entered into between the Commissioner and this taxpayer and that under the consent of September 1, 1923, the Commissioner was given a reasonable time after the date of its execution in which to determine and assess the deficienay. See Wirt Franklin v. Commissioner, 7 B. T. A. 636.

The consent between the parties was dated September 1, 1923. The deficiency notice from which the appeal is taken indicates that communications with respect to the tax liability of the petitioner were forwarded to it by the Commissioner under date of May 24, 1924, and January 15, 1925, and that application was made by the petitioner for assessment of its tax under sections 327 and 328 of the Revenue Act of 1918 and was considered by the Commissioner. It also appears that the consideration of the tax liability of the petitioner involved a consideration of its claim for refund and credit of taxes paid in the years 1909 to 1919. There is nothing in the record which leads us to believe that the twenty-month period which elapsed between the date when the consent was signed and the date when the Commissioner notified the taxpayer of his final determination was not a reasonable period within which the Commissioner might pass upon the contentions of the taxpayer with reference to its tax liability for the ten years involved, including the claims made for refund and credit.

The Revenue Act of 1924 extends the period within which the assessment of tax may be made by the period during which an appeal is pending before the Board. The same is true of the Revenue Act of 1926. Therefore, in considering what constituted a reasonable period under the consent, we have considered only the period between the date of its execution and the date when notice of the final determination of the Commissioner was mailed to the petitioner. Any further delay due to the pendency of this proceeding before the Board is not to be charged against the Commissioner and should not be considered in determining what constitutes a reasonable time for assessment of the tax.

Counsel for the petitioner contends in the alternative that, if the consent was valid, it nevertheless expired on April 1, 1924, or on September 1, 1924, which is one year from its date. This contention is based upon the public announcement made by the Commissioner under date of April 11, 1923, which is quoted in the findings above. This announcement related only to unlimited waivers then on file. The taxpayer does not bring itself expressly within the terms of such announcement but contends that it relied upon such announcement as limiting all future unlimited waivers to one year. There is nothing-in the record which would indicate that the officers of the petitioner had any knowledge of this announcement at the time the consent was executed or relied thereon. While this might be sufficient ground upon which to decide the instant appeal, we may point out that in our opinion there is nothing in this announcement of the Commissioner upon which the petitioner might have relied with respect to such a consent as we now have before us, executed after the date of the announcement and fixing no time within which the Commissioner was to act. Despite the announcement that waivers in use on that date extended the time for one year, there was nothing to prevent the Commissioner from thereafter entering into a consent extending the time for assessment for other periods or for an indefinite period.

The Commissioner was entitled to rely upon such a consent as we have here as granting a reasonable time within which he might act. It is our opinion that under such instrument the taxpayer could not plead that the period fixed by consent had expired, where, for example, by advancing one ground after another for the reduction of his tax, or requesting rehearings, or talcing other steps which might delay the final determination more than a year, he would not be able to show that the period which elapsed was unreasonable in the circumstances. In the present appeal we do not know what steps were taken or proceedings had between the date of the instrument and the final determination of the Commissioner. There is, however, no showing of any unreasonable delay and the deficiency letter indicates that active consideration was being given to the matter during that period.

We are therefore of the opinion that assessment of the deficiency is not barred by the statute. The proceeding will be set for hearing upon the merits in due course.


author: Green:

text:
    Farmers Co-operative Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 654.
    Promulgated July 13, 1927.
    Net income determined from the evidence.

      Isidor Zeigler, Esq., M. J. Holland, Esq., and F. W. McReynolds, Esq., for the petitioner.

      L. G. Mitchell, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of its income and profits-tax liability for the calendar year 1918, for which the Commissioner has determined a deficiency in the sum of $1,651.43. The issue involved is whether the Commissioner overstated the petitioner’s net income for 1918 in arriving at the deficiency.
    FINDINGS OF FACT.
    The petitioner is a corporation engaged in the cooperative business of buying and selling lumber, flour and feed, grain, coal, and live stock at Boyden, Iowa. It kept books of account on the accrual basis. During the calendar year 1918 it made, the following purchases and sales:

    The inventories of the above mentioned commodities at the beginning and end of the calendar year 1918 were as follows:

    In addition to the profits derived from the aforegoing purchases and sales the petitioner also received income during 1918 from the following sources:
    Discounts-$1,267.29
    Interest- 557. 73
    Miscellaneous- 100.45
    1, 925. 47
    In connection with its business following expenses: for the year 1918, it incurred the
    Livestock expense_$2, 522. 99
    Supplies _ 535. 31
    General expense_ 1,110. 08
    Repairs_ 97. 80
    Drayage_ 718. 65
    Telephone_ 119. 54
    Labor and salaries_ 7, 537. 56
    Bonuses (additional compensation) _ 200.00
    Light and power_ $82.11
    Income taxes_ 1, 635.33
    Other taxes- 545. 75
    Freight- 437.24
    Interest_ 2, 502. 49
    Patronage dividends_ 3, 200. 31
    Total_ 21,245.16
    During the taxable year in question the petitioner used certain property in its trade or business. The Commissioner determined that this property depreciated during the year to the extent of $1,055.42.
    The petitioner in operating its business extended a certain amount of credit to its customers. It ascertained during 1918 that at least five of its debtors would never be able to pay their accounts with the petitioner, whereupon the petitioner charged off on its books such accounts amounting to $615.40.
    The deficiency determined by the Commissioner was based in turn apon a determination of net income in the amount of $8,918.03. In determining this net income, the Commissioner allowed as one of (.he deductions from gross income patronage dividends in the amounl of $3,200.31.
   OPINION.

Green:

This proceeding involves the broad issue of determining the petitioner’s net income for the taxable year 1918 in accordance with section 232 of the Eevenue Act of 1918. The elements necessary to such a determination are set out in the findings of fact. A summary of such findings discloses a net taxable income to the petitioner for the calendar year 1918 of $2,813.57, set out as follows:

Gross sales- $731,153. 04
Inventory Dee. 31, 1917_ $42,901.43
Purchases during 1918_ 696, 549. 65
739, 451. 08
Inventory Dec. 31, 1918_ 30, 466. 79
Oost of goods sold_ 708, 984.29
Gross profits_ 22,168. 75
Add: Additional income_ 1, 925.47
Total-24, 094. 22
Deduct:
Expenses_ $21, 245.16
Depreciation. 1, 055.42
Bad debts_ 615.40
22, 915. 98
Net book income_ 1,178. 24
Add unallowable deductions:
Income taxes_:_ 1, 635. 33
Net taxable income_ 2, 813.57

The deficiency should.be redetermined based upon a net taxable income of $2,813.57 instead of $8,918.03.

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

Considered by SteRnhagen and Aeundell.


author: Arundell :

text:
    American Manganese Steel Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8145.
    Promulgated July 14, 1927.
    1. In taking inventory in 1919 petitioner determined that it had a surplus of merchandise, which, however, was in marketable condition, and thereupon it inaugurated a sales campaign to dispose of such surplus. A part of the surplus was sold in 1920, but. it was found that there was no market for the greater part, which was then scrapped during the year. Eeld, petitioner is entitled to reduce its inventory for the year 1920 on account of the scrapped merchandise.

      2. Overassfessment, not arising from claim in abatement, determined by respondent for the year 1919. Held,, the Board has no jurisdiction of the appeal for that year and motion to dismiss granted.

      G. A. Spencer, Esq., and F. H. Bryan, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
    This proceeding involves the determination by the Commissioner of an overassessment for the year 1919 in the amount of $23,947.92 and a deficiency for the year 1920 in the amount of $45,600. The question for determination is the year in which an inventory loss was sustained, the position of the petitioner being that the loss was sustained in the year 1920 and the position of the respondent being that the loss was sustained in the year 1919.
    FINDINGS OF FACT.
    The petitioner is a Maine corporation with its principal office in Chicago, Ill. During the taxable years in question it was engaged in the making of manganese steel castings to be used as integral parts in completed units manufactured by various other concerns and did not itself manufacture completed units. The products manufactured consisted of castings for rolling mills, manganese steel gears and pinions, castings for steam shovel builders, frogs, crossing inserts, switches, etc.
    Between September and December, 1919, a physical inventory was taken which disclosed surplus castings on hand in the amount of 883,520 pounds. These castings represented an accumulation for the past three or four years and were castings made in excess of specific orders given to petitioner. During the World War petitioner had a very large labor turnover and due to laxity and inefficiency of employees many castings were overmade. All of these castings, however, were properly made and not defective. After the inventory had been taken the president of the company examined the castings, comprising the 883,520 pounds, and it was his opinion that the castings were marketable. At a meeting of the executive committee held in New York on December 8, 1919, the president of petitioner reported the facts and after discussion, instructions were given to him to make a further investigation in regard to such castings and to make such disposition of them as he and the vice president considered proper under the circumstances. Thereafter, and during the month of December, 1919, the president instructed the sales department to institute a sales campaign to sell such castings. Several hundred letters were written to the company’s customers in regard to the sale of the castings. This sales campaign was carried on from the latter part of December, 1919, to June or July, 1920. The replies to the letters were generally unfavorable, the amount realized from such sales in 1920 being only $5,411.46. The management thereupon determined that the proper course to pursue was to scrap these castings, which action was taken in the year 1920.
    Petitioner valued the 883,520 pounds of castings in its closing inventory for 1919 and its opening inventory for 1920 at their cost of $134,716.03. The Commissioner valued such castings at $11,080.34 in the closing inventory for 1919 and the opening inventory for 1920, which represented the price at which a portion of the castings were sold in 1920, viz., $5,411.46, and the salvage value of the balance, or $5,668.88. The difference between the above amounts, viz., $134,-716.03 and $11,080.34, or $123,635.69, was allowed as an inventory loss by the Commissioner in 1919, wdiereas petitioner deducted the same amount in 1920.
   OPINION.

Arundell :

The Commissioner concedes that at the end of the year 1919 the taxpayer had on hand surplus castings amounting to 883,520 pounds and that these castings cost $134,716.03. It was contended by the Commissioner, however, that the surplus castings had only a scrap value at the end of the year 1919 and that this fact was known to petitioner. It was the practice of petitioner to overmake castings but these castings were never scrapped until an effort was first made to dispose of them and that practice was followed by it with reference to the surplus disclosed as a result of the inventory taken in the fall of 1919. It clearly appears from the evidence that the castings had been properly made and it was believed by the management of petitioner at the end of 1919 that at least a considerable portion of them might be disposed of as a result of a sales campaign. Under such circumstances we believe that petitioner was justified in leaving the castings in the inventory at their cost price until the result of the sales campaign could be determined. It was not until the following year of 1920 that it was definitely determined that there was no present market for most of these castings and during that year, and not before, the unsold castings were in fact scrapped. We are of the opinion that the inventory loss was properly taken in'the year 1920.

At the trial of the case the Commissioner moved that the petition be dismissed in so far as it related to the year 1919, for the reason that no deficiency was found for that year, but an overassessment in the amount of $23,947.92, which over assessment was not the result of action on a claim for abatement or otherwise represented such a determination as would give the Board jurisdiction. The motion of the Commissioner to dismiss the petition so far as the year 1919 is concerned is, therefore, granted. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255; Appeal of C. Willenborg & Co., 5 B. T. A. 788.

Judgment will be entered on IB days’ notice, under Rule SO.

Considered by SteRNIiageN and GeeeN.


author: Love:

text:
    William Cluff Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7242.
    Promulgated July 14, 1927.
    1. In tlie circumstances, held,, that a certain contract between petitioner and preferred stockholders does not constitute the latter creditors of the petitioner.
    2. Amounts paid to holders of preferred stock during the taxable year represented the payment of a dividend and not interest on an indebtedness.
    3. Discount allowed and expenses incurred in the issue and sale of preferred stock may not be taken as a deduction from gross income. Appeal of Emerson Electric Manufacturing Oo., 3 B. T. A. 932.

      Fredeñck C. Rohwerder, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes duly asserted by the respondent for the fiscal year ended August 31, 1920, in the amount of $1,094.62. The petitioner alleges that, in determining the deficiency, the respondent erred in the following particulars: (1) In considering and treating the preferred stock, issued by the petitioner as hereinafter set forth, and which the petitioner alleges represented borrowed capital, as a part of the petitioner’s capital stock, thereby including it in invested capital; (2) in disallowing as a deduction from gross income for the taxable year the amount of $23,488.88 paid and accrued during that year, which amount it is alleged, represented interest on the borrowed money represented by the preferred stock; (3) in disallowing as a deduction from gross income for the taxable year the amount of $1,783.76 which amount, it is alleged, represented a proportionate part of the discount allowed and exiienses incurred in the issue and sale of the preferred stock as hereinafter described.
    On leave granted, the respondent amended his answer and m his amended answer it is alleged that he erred in computing the petitioner’s invested capital for the taxable year in question, in that the full amount of the 1919 Federal taxes paid by the petitioner, to wit, $34,528.77, should have been excluded from the petitioner’s invested capital in lieu of the prorated amount, to wit, $14,552.15, as determined in his deficiency letter.
    The facts were stipulated.
    FINDINGS OF FACT.
    The petitioner is engaged in the wholesale grocery business. It was incorporated in November, 1893, under the laws of California and on October 18, 1919, it was reorganized by the formation of a new corporation under the laws of Delaware.
    At the time of the reorganization on October 18, 1919, the petitioner’s capital stock issued and outstanding consisted of $400,000 par value of common stock. After its reorganization on October 18, 1919, the new corporation (Delaware) issued its common stock of the par value of $400,000 to replace the common stock of the old corporation (California) of the same par value. On October 28, 1919, the new corporation (Delaware) sold for cash 4,000 shares of preferred stock of the par value of $400,000 for the sum of $382,500, thereby suffering a discount of $17,500. In addition to the discount of $17,500 the petitioner incurred expenses in connection with the issue and sale of the preferred stock amounting to $5,133.90.
    The purchasers of the preferred stock and the petitioner entered into an agreement which was set forth on the preferred stock certificates and is as follows:
    (a) The holders of record of the preferred stock shall be entitled to receive and the corporation shall be bound to pay thereon, when and as determined by the Board of Directors of this corporation, from the surplus or net profits arising from its business, dividends at the rate of seven per cent (7%) per annum, and no more, upon the par value of said stock, from the date of issue, payable in quarterly installments on the 15(h days of January, April, July, and October of each year, the first installment being payable on January 15, 1920. The current quarterly dividend upon the preferred stock shall be paid or set apart before any dividends shall be paid or set apart on the common stock. The dividends on the preferred stock shall be cumulative, so that there shall be no dividends paid or sot apart on the common stock until after full dividends on the issued and outstanding preferred stock for all previous dividend periods thereof and the current quarter dividend thereon, shall have been paid or set apart. Tf all dividends on the preferred stock for all previous dividend periods and also the dividend on the preferred stock for the current quarter shall have been paid or set apart, and if all the sinking fund payments hereinafter in paragraph (8) of Article Fourth of this Certificate, provided, which are then due and payable, shall have been paid, then the holders of record of the issued and outstanding common stock may receive, when and as determined by the Board of Directors, such dividends out of the remaining surplus or net profits arising from the business of this corporation as the Board of Directors may deem proper.
    (b) In the event of any liquidation or dissolution of the corporation, the holders of record of the issued and outstanding preferred stock shall, before any distribution shall be made to the holders of common stock, be entitled to be paid out of the surplus or net profits arising from the business of the corporation, and then remaining intact, or in case such profits shall be insufficient, then from the general assets of this corporation, the amount of the unpaid dividends, if any, accrued upon such preferred stock and also the full par value of said stock, and an additional amount equal to two and one-half per cent (2%%) of the par value of the preferred stock which they hold. After such payments to the holders of the preferred stock, the remaining assets and funds shall be divided among and paid equally to the holders of the common stock, according to the number of shares of common stock held by them respectively.
    (c) The preferred stock shall have no voting powers at meetings of stockholders, and the holders of said preferred stock shall not, by reason of their holdings thereof, be entitled to a vote at meetings of stockholders, the voting power being vested exclusively in the holders of common stock.
    (d) The issued and outstanding preferred stock shall be subject to redemption in whole or in part by the corporation, and the corporation may so redeem said preferred stock by paying to the holders of record of the stock redeemed One Hundred and Two and one-half per cent (102%%) of the par value thereof, and in addition the amount of the dividends, if any, accrued and unpaid thereon to the date of redemption. Whenever the corporation shall desire to redeem any preferred stock, it shall, prior to the date of redemption, cause to be published, once a week for four successive weeks, in a newspaper of general circulation, published in the City and County of San Francisco, State of California, (the first publication to be not more than sixty (60) or less than thirty (30) days prior to the date fixed for redemption), a notice stating that on a certain date and at a certain place named in said notice, the shares of stock specified in such notice will be redeemed, and that there will be due' and payable on such stock, at the place specified therein for payment, One Hundred and Two and one-half per cent (102%%) of the par value thereof, and in addition the amount of the dividends, if any, accrued and unpaid thereon, to the date of redemption. A copy of said published notice shall be mailed not less than thirty (30) days and not more than sixty (60) days prior to the date fixed for redemption, to each holder of record of said shares of preferred stock to be redeemed, at his, her or its address, as shown on the books of the corporation ; the shares of stock to be redeemed, unless all the issued and outstanding preferred stock is to be redeemed, shall be determined by lot, in such manner as may be determined and provided from time to time by resolution of the Board of Directors, or by the By-Laws of the corporation. The redemption shall be at such time and place as shall be determined by resolution of the Board of Directors of the corporation. From and after the date so fixed as the date of redemption, unless default should be made by this corporation in providing moneys at the time and place aforesaid, for the payment of the redemption price of said stock, all dividends on such preferred stock, so called for redemption, shall cease to accrue, and from and after said date all rights of the holders thereof, including such rights as they may have as stockholders of this corporation, except the right to receive such redemption price and accrued and unpaid dividends to date of redemption, shall cease and determine. All numbers of the certificates of the preferred stock so redeemed, shall be appropriately cancelled on the books of this corporation, and by the Registrar here' inafter referred to, and the stock evidenced thereby shall not be reissued.
    (e) While any of said preferred stock shall be issued and outstanding, anything herein contained to the contrary notwithstanding, the corporation, without the written consent of the holders of record of at least three-fourths of the amount of such then issued and outstanding preferred stock, shall not have the power: (a) to create any shares of stock which shall be in any respect on a parity with or have any preference or take priority over the preferred stock of the corporation; (b) to create any lien upon the real or personal property of the corporation, including stocks and securities, or any part thereof, for the purpose of securing an issue of bonds or other obligations, except that property may be acquired by this corporation, subject to a purchase money mortgage or lien; (c) to create any unsecured indebtedness maturing later than one (1) year from the date of issue; (d) to sell or otherwise dispose of by conveyance, transfer, lease, or mortgage, the property or business of this corporation to any extent that will impair the efficiency of this corporation as a going concern; (e) to alter in any manner the rights or preferences of the preferred stock; (f) to permit any subsidiary corporation to create or issue any additional shares of stock, unless this corporation shall simultaneously with such creation or issue, acquire its proportionate part thereof; the term “ subsidiary corporation ” whenever used herein shall be deemed to mean any other corporation, a majority of the capítol stock whereof is owned by this corporation.
    (f) The corporation shall, so long as any shares of said preferred stock remain, outstanding, maintain at all times an excess of its current assets over all of its current liabilities, equal to at least one hundred and fifty (150) per cent of the aggregate value of said preferred stock then outstanding, the terms “ current assets ” and “ current liabilities ” being more particularly defined in the Certificate of Incorporation of this corporation.
    (g) This corporation shall create a sinking fund with the Bank of California, National Association, of San Francisco, as Trustee, into which the corporation shall deposit annually, commencing with the first day of November, 1921, the following sums of money: November 1, 1921, $20,000; November 1, 1922, $20,000; November 1, 1923, $25,000; November 1, 1924, $25,000; November 1, 1925, $25,000; November 1, 1926, $25,000; November 1, 1927, $25,000; November 1, 1928, $25,000; November 1, 1929, $25,000; November 1, 1930, $30,000; November 1, 1931, $30,000; November 1, 1932, $30,000; November 1, 1933, $30,000; November 1, 1934, $30,000; November 1, 1935, $30,000; November 1, 1936, $15,000.
    The corporation may pay the whole or any part of the moneys herein provided to be deposited prior to the respective dates when the same become due.
    The money so deposited in the sinking fund, until set apart for the redemption of preferred stock by the corporation, as hereinafter provided, shall be forthwith used by the trustee to purchase for redemption any of the then issued and outstanding preferred stock of the corporation obtainable in the open market for any price not to exceed One Hundred and Two Hollars and Fifty Cents ($102.50) per share, and all stock so purchased shall be delivered to the corporation to be cancelled and shall not be reissued.
    At any time after the expiration of thirty days from the date of the deposit by the corporation of any money into the sinking fund, the trustee, upon the written request of the corporation, shall set apart for the redemption of the preferred stock by the corporation as provided in paragraph (d) hereof, such money or any part thereof, which up to the date of said written request by the corporation, may not have been used or applied by the trustee for the purpose of purchasing preferred stock as hereinabove provided. The moneys so set apart, pursuant to any such request, shall be used forthwith by the corporation for the exclusive purpose of redeeming the preferred stock in the manner provided in paragraph (d) ; provided, however, that the money so used by the corporation for redemption shall be applied only for the payment of One Hundred and Two and one-half per cent (102%%) of the par value of the stock redeemed; and any payments which may be required to be mude on account of accrued and unpaid dividends shall be paid from the surplus or net profits of the corporation.

      The request, in writing, in the name of the corporation by its President or Vice-President, and its Secretary, under its corporate name and seal, together with a certified copy of a resolution of the Board of Directors authorizing the execution of such written request, and authorizing the redemption of the preferred stock with the moneys requested to be set apart, shall be full and complete warrant and authority to the trustee to set apart any of the moneys in' the sinking fund for the purpose of such redemption as hereinabove provided, and for the payment of such moneys for the redemption of the preferred stock.
    In the event that the corporation default in the payment of any of the sums of money herein provided to be deposited by it in the sinking fund, the payment thereof shall be enforceable by the trustee in the same manner as the payment of any unconditional claim or debt against the corporation; and said trustee must, upon the written consent of one-third (%) of the holders of record of the then issued and outstanding preferred stock, and upon being indemnified to its entire satisfaction, proceed to enforce the payment of said unpaid sum or sums, as hereinabove provided.
    (h) The trustee of the sinking fund shall also act as Registrar, for the purpose of registering and recording in a book kept by it for that purpose, the issuance, transfer, and cancellation of the shares of preferred stock, and the names of the holders of record thereof, and no certificate or other instrument evidencing the issuance by the corporation of shares of the preferred stock shall be issued or be valid or binding upon the corporation unless the fact of the registration of the shares of preferred stock, so issued or transferred and evidenced thereby, shall appropriately appear on the face of such certificate or instrument over the name of the trustee.
    (i) Within ninety (90) days after the close of each fiscal year, the corporation shall prepare or cause to be prepared, and shall file with the trustee of the sinking fund, an itemized statement of the income account of the corporation for such year, and a balance sheet taken at the close thereof, which balance sheet shall be certified by some responsible certified accountant or firm of accountants of national reputation. The balance sheet shall set forth the financial condition of the corporation, and among other things shall show first, its current assets at not to exceed their actual value, and second, the amount of all its liabilities. While any of the preferred stock of the corporation is issued and outstanding, there shall remain on file with the trustee, a certified copy of the Certificate of Incorporation of the corporation, and any amendments thereof.
    Any holder of record of the preferred stock shall be entitled during usual business hours to inspect said itemized statement or said Certificate of Incorporation at the place of business of the trustee.
    (j) The trustee shall not be answerable for anything whatsoever in connection with its duties and the trusts hereby created except its own wilful misconduct or gross negligence. The trustee may at any time resign; the Board of Directors of the corporation may remove the trustee and, in the event of its resignation or removal, substitute another trustee in its place and stead, upon the affirmative vote or written consent to such removal or substitution of two-tliirds (%) of the holders of record of the then issued and outstanding shares of common stock of the corporation and the consent in writing to such removal and substitution by not less than three-fourths (%) of the holders of record of the then issued and outstanding preferred stock. Upon the resignation or removal of the trustee, and the substitution of another trustee in its place and stead, the new trustee so substituted shall become vested with all the rights, duties, moneys, and trusts hereunder of the former trustee with like effect as the original trustee named in this Certificate.

      The petitioner, in its return for the fiscal period ended August 31, 1920, deducted from gross income the amount of $23,488.88 paid or accrued to the holders of the preferred stock during the period in question, which amount the petitioner designated as interest. The petitioner for the fiscal period ended August 31, 1920, also deducted from gross income the amount of $1,783.76, the proportionate part, based on the agreement with the purchasers of the'preferred stock of the discount in the amount of $17,500 and the expenses in the amount of $5,133.90. The petitioner did not include in its invested capital any part of the proceeds from the sale of the preferred stock in the amount of $382,500.
    Upon audit of the petitioner’s return for the fiscal period ended August 31, 1920, the Commissioner disallowed as a deduction from gross income the amount of $23,488.88, alleged by the petitioner to represent interest paid or accrued to the holders of the preferred stock during the taxable period in question, and he also disallowed as a deduction the amount of $1,783.76, being the proportionate part of the discount and expenses in respect of the issue of the preferred stock. The proceeds from the issue and sale of the preferred stock in the amount of $382,500 were prorated by the Commissioner from October 28, 1919, to August 31, 1920, and the amount of $322,930.33 was included in the petitioner’s invested capital for the fiscal period ended August 31, 1920. The Commissioner also included in the petitioner’s invested capital, for the period ended August 31, 1920, the amount of $14,552.15, being “ 1919 tax ” $34,528.77 prorated to the date payable.
   OPINION.

Love:

The petitioner contends that the holders of the preferred stock, issued in the form and amount as set forth in the findings of fact, are its creditors and not its stockholders.

The respondent takes the position that the holders of the preferred stock were stockholders and has disallowed for that reason the deductions claimed by the petitioner, and has included in the petitioner’s invested capital the prorated proceeds of the sale of the preferred stock. If the holders of the preferred stock are stockholders and not creditors of the petitioner the respondent did not err in disallowing the deduction claimed in the amount of $23,488.88 for the reason that that amount represented dividends paid and accrued to the preferred stockholders. Arthur R. Jones Syndicate v. Commissioner, 5 B. T. A. 853; neither did he err in disallowing the deduction claimed on account of discount at which the preferred stock was sold, nor on account of the expenses incident to the issue and sale of the preferred stock. Appeal of Emerson Electric Manu facturing Co., 3 B. T. A. 932. We must look solely, therefore, to the contract between the petitioner and the holders of the preferred stock in order to determine the relationship existing between them. The contract between the petitioner and the holders of the preferred stock is set out above, and stated briefly, it provides that 7 per cent cumulative dividends shall be paid to the preferred stockholders out of surplus or net profits when and as determined by the board of directors; that upon dissolution of the petitioner dividends accrued and unpaid shall be paid out of general assets, if the surplus is insufficient, and also that the stock shall be redeemed at $102.50 per share; that the preferred stock shall have no voting rights; that while any preferred stock is outstanding the petitioner can not, except under certain conditions, create any shares having priority over the preferred stock, can not mortgage any of its property or issue bonds secured by mortgage or create.any unsecured indebtedness maturing later than one year from the date of issue or do anything that would impair its efficiency as a going concern; that an excess of current assets over current liabilities must be maintained in an amount of at least 150 per cent of the preferred stock outstanding; that a sinking fund must be established for the purpose of redeeming the preferred stock and into which the petitioner must pay specified sums annually; that the preferred stock shall be subject to redemption at $102.50 per share plus accrued dividends upon certain notice given.

In the Appeal of I. Unterberg & Co., 2 B. T. A. 274, we stated:

It can not be doubted that the nature of an instrument may, because of its terms and the circumstances of its issuance and subsistence, be held to be different from what it is denominated. The decisions are numerous in which the courts have held bonds to be stock * * *.

Considering the contract between the petitioner and the preferred stockholders, we are of the opinion that there is nothing therein which takes the holders of the preferred stock out of the class of stockholders. To be sure the holders of this class of stock are preferred in such a manner that they are almost certain to have their stock redeemed. However, a preference over common stockholders makes them none the less stockholders. It appears to us that the contract between the petitioner and the preferred stockholders evidenced only an intention to create and maintain a preference in favor of the preferred as against the common stock.

In Arthur R. Jones Syndicate v. Commissioner, supra, we stated that the fundamental characteristic of a share of stock is that the holder is a coowner of the business and not a creditor and that a share of stock carries the right to share in surplus profits and assets after corporate debts are paid. In the instant appeal it is clear that at any time befor-e dissolution of the petitioner dividends were to be paid only out oí surplus and net profits, and upon dissolution the preferred stock would be preferred as against the common stock in the distribution of assets. It is equally clear that corporate debts would have to be paid first.

The case of Spencer v. Smith, 201 Fed. 647, dealt with the question as to whether holders of preferred stock which was secured by a mortgage on the corporation’s property were stockholders or creditors of the corporation. The court decided that corporate preferred stock which guaranteed 10 per cent out of net profits, reserved the corporation the right to redeem after a sjiecified date, bound it to redeem before a later date, and provided that the holders on failure to pay dividends, might foreclose a trust mortgage given to secure the stock on all the corporation’s property, in which the preferred stockholders were entitled to participate ratably, did not constitute the holders thereof creditors of the corporation even though upon dissolution of the corporation and distribution of the assets the preferred stockholders were given a preference of $11 per share. In considering the case the court stated:

We are therefore of the opinion that the present holders of the preferred stock of the corporation are not creditors thereof, but stockholders; that the provision contained in the certificate of the preferred stock, giving a preference of eleven dollars per share to the holders thereof, refers only to the distribution of assets as between stockholders, and has no reference to the distribution of assets for the payment of the debts of the corporation; that, if by any interpretation it could be construed as referring to the distribution of assets to pay debts, then it is void as against public policy. These views are sustained by an 'examination of the certificate of stock and the decisions of the courts. What parties to a contract may call it, of course, is not binding upon the courts if it is clearly something else. Still in arriving at the intention of the parties, we may look to the language which they used in reducing their contract to writing.
* * * * * * *
If thereafter the corporation made profits, the holder of any preferred stock would receive dividends; and if at any time the corporation was dissolved and its assets were distributed, the preferred stock would be preferred as against the common stock. The performance of this agreement could be and was secured by a mortgage. This view renders the transaction reasonable and valid.

Examining, in the light of principles laid down, the provisions contained in the agreement between the petitioner and preferred stockholders, we are of the opinion that the preferred stock did not represent merely an indebtedness of the petitioner to the holders thereof, but, on the contrary, represented shares in the petitioner’s business. The amount of $28,488.88 paid and accrued to the holders of preferred stock during the year in question constituted, therefore, dividends, and as such is not deductible. The determination of the respondent in disallowing the deduction taken on account of discount and expenses with respect to the preferred stock issued by the petitioner is also approved.

The respondent alleges in his amended answer that he erred in computing the petitioner’s invested capital for the taxable period ended August 31, 1920, in that he excluded therefrom only the prorated amount of the 1919 Federal taxes paid by the petitioner instead of the full amount thereof. In the Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168, we held that adjustments made in accordance with article 845, Regulations 45, Revised January 28, 1921, were correct and accordingly approved the exclusion from invested capital for a taxable year the prorated amount of Federal taxes for the preceding year which are due and payable. We, therefore, affirm the determination made with respect to the petitioner’s invested capital for the period ended August 31, 1920.

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

Considered by Thitssell and Littleton.