author: Smith Trammell,

text:
    Appeal of HIGH SHOALS CO.
    Docket No. 1686.
    Submitted June 25, 1925.
    Decided January 14, 1926.
    The evidence does not warrant a finding that there was such an abnormality of income or capital of the taxpayer for the calendar year 1918 and for the two-month period ended February 29, 1920, as entitles it to a determination of tax liability under section 328 of the Revenue Act of 1918.

      E. S. Parker, Esq,, for the taxpayer.

      Arthur H. Fast, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Teussell.
    This is an appeal from the determination of deficiencies for the year 1918 in the amount of $7,760.99, and for the two-month period ended February 29, 1920, in the amount of $14,546.52. The sole issue is whether the taxpayer is entitled to have its liability for profits tax for the year and period stated above computed under the provisions of section 328 of the Revenue Act of 1918.
    FINDINGS OE FACT.
    The taxpayer was a North Carolina corporation with its principal office at Charlotte. It was organized in 1899 and was dissolved on February 29, 1920. It was engaged in the manufacture of cotton cloth.
    The original mill building was constructed at a cost somewhat less than the prevailing cost for the construction of similar buildings in the vicinity by contractors. The bricks for the foundation and walls were made on the taxpayer’s premises, and when laid represented a cost of approximately $4,50 per thousand. The prevailing cost at that time, in the vicinity of taxpayer’s mills, for brick laid in the wall by building contractors was approximately $8 to $10 per thousand. Cord wood for the kilns was cut from the taxpayer’s lands.
    Additions to the original mill building were made in 1902 and 1903. The bricks used in the construction of these additions represented a cost to the taxpayer of approximately $6.25 per thousand, laid in the wall. The prevailing cost at that time, in the vicinity of the taxpayer’s mills, for brick laid in the wall by building contractors, was approximately $10 to $12 per thousand.
    During the year 1918 and the fiscal period 1920, the taxpayer’s mills were operated partly by water power developed and owned by the taxpayer, and partly by electric power purchased from a public utility company. The developed water power yielded approximately 700 horsepower, averaged for the whole year on a daily run of 24 hours.- The cost of developing this water power, as shown by the books of account, was $50,000. The prevailing market price for hydroelectric power was approximately $22.50 per horsepower for a 12-hour run. The carding and spinning departments of the taxpayer’s mills were operated 24 hours per day approximately 300 days in the year.
    In 1920 the capital stock of the taxpayer was sold for $1,145,520. The purchasers withdrew liquid assets amounting to $329,333.47, and assumed liabilities amounting to $75,943.50, leaving an amount paid for plant of $892,130.12 as of March 1, 1920. The purchasers figured the water power to be worth about $350,000 to them.
    For the year 1918 the net income and invested capital, as determined by the Commissioner, are, respectively, $217,508.96 and $532,-578.17. The net income is 40.84 per cent of the invested capital. The profits-tax liability, as determined by the Commissioner under section 301, is $129,000.91, or 59.31 per cent of the net income.
    For the two-month period ended February 29, 1920, the net income and invested capital, as determined by the Commissioner, are, respectively, $56,042.11 and $108,620.28. The net income is 51.59 per cent of the invested capital. The profits-tax liability, as determined by the Commissioner under section 301, is $16,234.11, or 28.96 per cent of the net income.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Smith

: The taxpayer’s sole allegation of error is that the Commissioner erred in denying the taxpayer’s appeal for relief under the provisions of section 328 for the calendar year 1918 and for the two-month period ended February 29, 1920. The alleged facts upon which the taxpayer relies as the basis of its appeal are as follows:

(a) Due to the fact that the officers owned a large percentage of stock, the salaries paid them were abnormally low.

(5) The taxpayer owned and used in its business a water power carried on its books at $50,000,but worth between $300,000 and $400,000.

(c) The president and principal stockholder of the corporation, one D. A. Tompkins, was a manufacturer of textile machinery, and a large part of the machinery used in the cotton mill was built in the machinery factory at a reduced cost, or, in many cases, at no cost whatever to the corporation.

(d) The mill was operated double time and in this way one investment was made to produce approximately double the net income.

In addition to the foregoing, the taxpayer alleges that its true invested capital can not be satisfactorily determined.

With respect to the first allegation of error, the taxpayer has not submitted any evidence as to the salaries paid to executive officers of other corporations and the Board is not in possession of information which enables it to determine whether the salaries paid to its executive officers were abnormally low in comparison with the salaries paid to officers of other similar corporations.

The greater portion of the evidence presented by the taxpayer is directed toward the proof that a water power which cost approximately $50,000 was worth between $300,000 and $400,000 during the taxable periods herein considered. The evidence shows that, through the expenditure of approximately $50,000 for the construction of the dam and appurtenances for. water power, the taxpayer has harnessed the waters of a stream on the site of its mill and from that source is receiving the year round power for the partial operation of its mill, some departments of which are operating 24 hours per day 300 days in the year. The total power received from this source was 700 horsepower. During the year and period under review hydroelectric power was available in the vicinity of the taxpayer’s mill at $22.50 per horsepower on a 12-hour run. Thus, a very considerable saving resulted from the availability and use of this water power. The purchasers of the capital stock in 1920 figured that the water power had a value of $350,000.

It is to be noted, however, that invested capital under the statute is to be computed upon the basis of the capital embarked by the stockholders in the corporation and upon the surplus earned subsequent to organization. Tangible property paid in for shares of capital stock is to be included in invested capital only to the extent of the value of the tangible property “ at the time of such payment.” Section 326 (a) (2), Revenue Act of 1918. The increase in the value of the property paid in to the corporation or acquired by it may not be included in invested capital under the statute. No evidence is before the Board in this appeal that the water power cost the taxpayer in excess of $50,000 at the time it was acquired. The proof that it had a much greater value in 1918 and 1920, standing alone, is insufficient to establish the right of the taxpayer to relief under the provisions of section 328 of the Eevenue Act of 1918.

The third contention of an abnormality in invested capital is that one D. A. Tompkins, president and principal stockholder of the corporation, during the early period of its existence, contributed textile machinery at no cost whatever to the taxpayer and also sold machinery to it at less than the actual market value. This allegation is supported by the evidence of one witness, the superintendent of the mill for many years, who gives his testimony from memory. He testified that Tompkins had contributed 1 spinning frame, 4 spoolers, 6 reels, 1 starch kettle, 1 banding machine, and 1 baling press. The value of this equipment is not in evidence. It is stated that these machines were in the mill in 1918, but the extent to which they had depreciated is not known. The witness had never kept and apparently never had access to the books of the corporation to know whether the fact of the gift of this equipment to the corporation had been taken into account in determining the amount of depreciation which had been sustained up to the year 1918. There is no proof that Tompkins ever sold machinery to the taxpayer at less than market value. In the light of the meager information upon this point we do not think that the taxpayer has sustained the burden of proof in supporting its allegation that an abnormality of invested capital is attributable to the contribution of this equipment.

The fact that the mill was operated double time during the taxable periods under review does not prove an abnormality either of income or of invested capital.

From a consideration of the entire record the Board is of the opinion that the evidence does not show such an abnormality of net income or invested capital for the calendar year 1918 and for the two-month period ended February 29, 1920, as warrants a determination of tax liability under section 328 of the Eevenue Act of 1918.

On reference to the Board:

Trammell,

dissenting: I am unable to concur in the decision and opinion of the Board in the above appeal.

In my opinion the appeal presents a situation which clearly comes within the provisions of section 327 of the Eevenue Act of 1918. The taxpayer constructed its original mill building at less than the market price prevailing at the time, because the brick for the foundation and walls was made on the taxpayer’s premises and cost approximately $4.50 per thousand when laid, whereas the prevailing cost at that time was approximately $8 to $10 per thousand. The same situation existed with respect to additions to the original mill building. The brick cost approximately $6.25 per thousand while the prevailing market price was approximately $12 per thousand. In other words, the brick used in the construction of these buildings cost the taxpayer approximately 50' per cent of the market value. No evidence was introduced, however, as to the investment in these assets or their value when acquired. We have, therefore, no means of determining whether capital was substantially affected by the foregoing circumstances.

But, in addition to the foregoing facts, the taxpayer developed water rights which yielded approximately 700 horsepower. The cost of developing this water power was approximately $50,000, and, when developed at such expense, had an estimated value of from $350,000 to $400,000. This was a material income-producing factor in the business. The taxpayer thus had and used in its business, as a material part of its capital assets, property of a substantial value which it could not include in invested capital due to the limitations of section 326.

The opinion states that invested capital, under the statute, is to be computed upon the basis of the capital embarked by the stockholders and upon the surplus earned or paid in subsequent to organization. This is undoubtedly true, but the question then presents itself whether, when the taxpayer has in its business assets of a recognized and substantial value which are producing income and which it can not capitalize, due to the limitations of section 326, an •abnormality exists which brings it within the provisions of section 327. My view is that it does. That fact, in my opinion, is an abnormality affecting capital, as provided in section 327, provided the amount excluded from invested capital on this account is substantial in amount. If, on account of such exclusion, an exceptional hardship results, as evidenced by a gross disproportion between the tax computed without the benefit of that section and the tax computed by a reference to representative corporations, as specified in section 328, the taxpayer is entitled to relief, according to my interpretation of the statute.

As an illustration, take the case of a corporation which has patents ■of a recognized value of $10,000,000, but which it has developed in its business at a cost of $10,000. Under section 326 it can include in invested capital only the $10,000, which is the cost of development and acquisition of the patents. Yet, if the patents when acquired had an actual value of $10,000,000, it seems to me that it would be perfectly clear that an abnormality in capital existed and that an-exceptional hardship would be placed upon such a taxpayer if the excess-profits credit were allowed it upon the basis only of cost of acquisition of such patents. If such a situation is not an abnormality in capital, or, if the case of a taxpayer having in its business capital assets which it can not include in invested capital, due .to-the operation of section 326, does not present an abnormal situation-affecting capital as contemplated in section 327, I do not know of any case or set of facts which constitutes an abnormality in respect-to capital.

I believe that the congressional history of the legislation involved and the discussions during the progress of the legislation in Congress, amply support the position I have taken in this appeal. This is-illustrated by the following quotation from the report of the Senate-Finance Committee to the Senate while the Eevenue Act of 1918 was before that body:

* * * ipjjg pregent statutory rule works well in a large majority of cases. The remaining eases in which it works injustice can and should be cared for by adequate relief provisions which the Committee has carefully formulated and recommends. The Committee therefore endorses the general-rule expressed by the House bill in paragraph 3 of sub-division (a) of section 326, but believes that in certain exceptional cases inability to reeognize-appreciation furnishes just ground for relief and in order that such relief may not be imperiled by over-emphasis upon the general principle, recommends that the explicit denial of the right to include any increase in value-of assets over original cost be stricken from section 326.

The question before the committee at that time was whether section 326 should contain an express provision that the increase in value of assets over cost should not be included in invested capital. The committee clearly had in mind in making that report that such, a situation might present a case where relief should be granted under-section 328.

Section 327, as it passed the House, was amended in the Senate-by adding additional grounds for relief. Subdivision (3) was-changed to read, in part, as follows:

Where the invested capital is materially disproportionate to the net income-as compared with representative corporations engaged in a like or similar-trade or business because: * * *
2. There are excluded from the' invested capital as computed under the provisions of section 326, intangible assets of recognized and substantial value built up or developed by the taxpayer * * ⅜.

Mr. Kitchin, who was in charge of the bill in the House and who was a member of the conference committee, in his report from the committee to the House, referred to the changes as follows:

The Senate amendment increases the classes of eases in which the tax is to be fixed by reference to the experience of representative corporations; includes therein all foreign corporations, and provides that in such cases the tax shall be the amount which, hears the same ratio to the net income of the taxpayer for the taxable year as the average tax of representative corporations engaged in a like or similar trade or business bears to their average net income for such years.
The House recedes with amendments :
(1) Making clerical changes;
(2) Oonsolidating a number of separate classes of cases differentiated in the Senate amendment into a single class of cases * * *.

It thus seems that the purpose of section 327, as finally passed, was to consolidate the provisions set out separately in the amendments which enlarged the scope thereof within a single class of ■cases. In my opinion, it was not the intention of Congress to make section 327 any narrower than the language of the amendments clearly and specifically provided.

Even the most strict construction of section 327, in my opinion, would warrant my view in this appeal, but this being admittedly relief legislation, it should be given a broad and liberal construction.

I readily agree that there is not sufficient evidence in this appeal to entitle the taxpayer to relief under section 328, because no evidence of the taxes paid by representative concerns has been introduced, and this being true, we have no means of knowing whether the taxpayer has suffered an exceptional hardship as evidenced by gross disproportion between the tax computed without the benefit of this section and the tax computed by reference to representative ■corporations specified in section 328. However, this does not mean that there was not an abnormality in the capital of this taxpayer, -and the Board, in other appeals, has determined that there was abnormality in capital or income and has referred the case back to the Commissioner for the selection of proper comparatives. Since an abnormality in capital clearly exists in this appeal, I differ from the Board in that I think the case should be referred to the Commissioner for the selection of comparatives and the determination of the tax based upon the use thereof.

Phillips concurring.


source: Caselaw Access Project

license: Public Domain

text:
    Appeal of GORDON FURNITURE CO.
    Docket No. 2470.
    Submitted October 30, 1925.
    Decided January 14, 1926.

      Albert H. Winter, O. P. A., for the taxpayer.

      Briggs G. Simpieh, Esg., for the Commissioner.
    Before SteRnhagen, Lansdon, and Arundell.
    The Commissioner determined a deficiency for 1920 of $3,915.69, of which the taxpayer admits part and appeals from so much thereof as results from the disallowance of a deduction of $7,205, representing an alleged additional salary of the president for that year.

      FINDINGS OF FACT.
    The taxpayer is an Indiana corporation, with its principal place of business at Indianapolis. It was incorporated in the spring of 1919 and began business the following September.
    On February 5, 1920, its directors adopted the following, as shown by the minutes:
    On motion made by Mr. Melville S. Cohn, and duly seconded, the president of the company was authorized to fix all salaries of executive officers, including his own, to increase or decrease same as in his judgment conditions warranted, and to take such steps, with relation to financial management of the company’s assets, as were in his judgment, for the company’s welfare.
    The motion being put upon its passage was unanimously adopted.
    The president, during the taxable year and theretofore, received a fixed salary of $6,300 a year.
    About the 1st of December the president told the bookkeeper that the president’s salary was to be increased. The president had increased the salaries of several others, including the vice president, and said to the bookkeeper at that time that the increase in the president’s salary, based upon the business done in the 11 months already passed, would be in the neighborhood of $7,000, but that the exact amount would be ascertained after the close of the year. About December 31, 1920, or January 1, 1921, the bookkeeper was told the amount of the increase would be $7,205, and was. directed to enter it in the books. The bookkeeper forgot to make the entry before the books were closed. Sometime in March, when the president was going over his account, he called the bookkeeper’s attention to the omission, and an entry was then made.
    The president included the amount as gross income in his individual income-tax return for 1920.
   DECISION.

The item of $7,205 paid to the president as salary is properly deductible by the corporation in its return for 1920. The deficiency should be computed accordingly. Final determination will be settled on 10 days’ notice, under Eule 50.


text:
    Appeal of HENRY GRIMMER.
    Docket No. 3393.
    Submitted October 15, 1925.
    Decided January 14, 1926.

      Clyde II. Hunter y C. P. A., for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Arundell.
    The taxpayer appeals from the determination of a deficiency of $1,142.41 in income tax for the year 1920. He alleges that the Commissioner erred in requiring that the income of the taxpayer and his wife should be included in a joint return after they had elected to file separate returns. The facts are stipulated.
    FINDINGS OF FACT.
    On January 1, 1915, a certain farm, consisting of approximately 120 acres located in the County of Bureau, Ill., was purchased for $12,400. The title was taken in the name of Anna Grimmer, the taxpayer’s wife, with whom he was living during the taxable year in question. Of the consideration paid for the land, $5,000 was paid out of a fund which was inherited by the wife from her mother. This was her separate property. The balance, $7,400, was paid out of the general funds that had been accumulated by the husband and wife in the business of farming and loaning money.
    The farm was sold in 1920 for $24,000, at a gain of $11,600.
   DECISION.

The profit from the sale of the farm is determined to have been realized by Anna Grimmer in the amount of $11,600. Final determination will be settled on 15 days’ notice, under Rule 50.


author: Smith

text:
    Appeal of LYNCH CONSTRUCTION CO.
    Docket No. 3375.
    Submitted October 15, 1925.
    Decided January 14, 1926.
    A corporation taxpayer making its returns upon a calendar year basis and engaged in business during a part of the calendar year 1918, and operating at a loss during tbe calendar year 1919, is entitled to deduct such net loss from the net income of 1918, under the provisions of section 204 of the Revenue Act of 1918.

      B. S. Barron, Esq., for the taxpayer.

      John W. Fisher, Esq.,, for the Commissioner.
    Before Smith, James, Littleton, and Trussell.
    This is an appeal from the determination of a deficiency in income and profits tax for the fiscal period ended December 31, 1918, in the amount of $8,405.78. The question in issue is the right of the corporation taxpayer, which made its return for a part of the calendar year 1918, to deduct from the net income shown upon such return a net loss for the calendar year 1919.
    FINDINGS OF FACT.
    The taxpayer was organized March 25, 1918, and filed its first tax return for the period from that date to December 31, 1918, which return showed a net income of $24,744.08. The taxpayer filed a return for the calendar .year 1919 which showed a net loss. It sought to deduct the net loss sustained by it in the calendar year 1919 from the net income realized by it for the period beginning March 25, 1918, and ending December 31, 1918. The Commissioner disallowed the deduction of such a net loss and the deficiency is at least in part predicated upon such disallowance.
    DECISION.
    The deficiency, if any, should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, in accordance with Rule 50.
   opinion. •

Smith

: The sole question in this appeal is whether the taxpayer, a corporation organized during the year 1918, and having a net income for that year, is entitled to deduct from that net income, under the provisions of section 204 of the Revenue Act of 1918, a net loss sustained for the calendar year 1919. The Commissioner has disallowed the deduction upon the ground that the taxpayer was not in existence for a full twelve-month period prior to December 31, 1918. The taxpayer claims the right to make the deduction under the law as interpreted by this Board in Appeal of Carroll Chain Co., 1 B. T. A. 38. The Commissioner cites Appeal of Butler's Warehouses, Inc., 1 B. T. A. 851, in support of his contention.

The salient fact in the decision in Appeal of Butler's Warehouses, Inc., supra, was that it was incorporated January 17, 1919, and that it had no- corporate existence during the year 1918. In the course of the opinion in that appeal it was stated:

If the taxpayer had been incorporated and had been engaged in business during the calendar year 1918, there is no doubt but that a net loss which was sustained by it during the calendar year 1919 could have been deducted from the net income of the year 1918, and the excess of the net loss could be deducted from the gross income of the year 1920. The taxpayer was not, however, in existence during the year 1918, and the question arises as to whether its situation is any different from what it would have been if it had been in existence during that year.

The decision of the Board was1 that, inasmuch as it was not in existence during any part of 1918, it could not by any possibility have a net income for 1918 against which a net loss for 1919 could be applied.

The material question in this appeal is whether the term “ taxable year,” as contained in section 204 (b) of the Revenue Act of 1918, is to be construed as requiring the legal existence of a corporation for a twelve-month period. This is precisely the question that was decided in the Appeal of Carroll Chain Co., supra, under a similar definition of taxable year contained in the Revenue Act of 1921. We think that it was immaterial that the taxpayer was in existence for only a fractional part of the year 1918. It is entitled to have the net loss sustained by it for the year' 1919 applied against the net income for the fractional part of the year 1918 during which it was in existence.

In its petition the taxpayer alleges that the net loss sustained by it during the calendar year 1919 was in excess of the net income received by it from March 25 to December 31, 1918, inclusive, and, although the Commissioner admits that the taxpayer filed a return for 1919 which showed a net loss, the amount thereof was not admitted and the taxpayer has submitted no proof upoir the point. Whatever the amount of the net loss was, it should be applied against the net income of the period ended December 31, 1918, and the balance, if any, against the net income for the year 1920. Appeal of Patapsco Ballast Co., 1 B. T. A. 1081.


author: Marquette

text:
    Appeal of NELSON LAND & OIL CO.
    Docket No. 1539.
    Submitted May 21, 1925.
    Decided January 14, 1926.
    1. Certain instruments herein construed and held to be oil and gas leases, and not conveyances of oil or gas in place.
    2. Amounts paid to the grantor of an oil and gasl lease as a bonus held to constitute additional royalties and not a return of capital.

      B. Kemp Slaughter, Ésg., for the taxpayer.

      A. H. Fast, Esq., for the Commissioner.
    Before MaRqttette and MoeRis.
    This is an appeal from the determination of a deficiency in income and profits taxes for the year 1919 in the amount of $6,254.31. The sole issue arises out of the action of the Commissioner in increasing the net income for 1919 by the amount of $19,879, representing a bonus paid to the taxpayer in that year upon its grant of certain oil and gas leases to the Carter Oil Co.

      FINDINGS OF FACT.
    Taxpayer is a corporation with its principal place of business at Charleston, W. Ya.
    On April 29, 1919, it acquired from the Boone Coal Land Co. two tracts of land in fee simple, and all the coal, oil, gas, and other minerals and mineral substances, and mining privileges in, upon, and under three other tracts of land; all of which lands were situated in Sherman District of Boone County, W. Ya., on the waters of Big Coal River and Laurel Creek, a tributary thereof. The total purchase price amounted to $70,993.40, of which $10,000 was paid upon execution of the contract of sale, the balance to be paid in annual installments over a period of five years, as stipulated in the contract. The contract of sale estimated the total acreage of the lands involved to be 1,577.3 acres, divided as follows:
    Acres.
    Tract No. 1_'_ 92
    Tract No. 2- 65. 5
    Tract No. 3- 95
    Tract No. 4- 531
    Tract No. 5_ 794
    Total- 1,577.5
    Tracts Nos. 3 and 5 are the lands as to which the taxpayer acquired title in fee simple; while as to tracts Nos. 1, 2, and 4 only the minerals in place were acquired, with such rights as were necessary and incidental to the exploration, development, and extraction of the minerals lying in, upon, and under the land.
    On the same date a further and supplemental agreement was entered into by the taxpayer and the Boone Coal Land Co., which in terms provided as follows:
    This Agreement, Made tlie 29th day of April, 1919, by and between Boone Coal Land Company, a corporation organized and existing under the laws of the State of West Virginia, party of the first part, and The Nelson Land and Oil Company, a corporation organized and existing under and by virtue of the laws of the State of Maryland, party of the.second part;
    Whereas, by deed of even date herewith the said first party has conveyed to the second party herein certain lands situate in Boone County, West Virginia, part of the consideration in which conveyance is in the form of nonnegotiable notes; and
    Whereas, there are certain unreleased vendor’s liens retained in some of the deeds in the title of the first party hereto to a part of said land; also certain taxes on a part thereof, which will have to be paid to relieve said title from forfeiture, and by reason of said forfeiture, or otherwise, title of the first party may fail as to part of said land.
    Now, therefore, this agreement witnesseth:
    In consideration of said conveyance and the money consideration therein stated, the first party hereto hereby agrees to promptly have released of record all valid liens now standing on or against said lands or any part thereof; to pay all back taxes due thereon, and to take such steps as will fully relieve and redeem said title from forfeiture, and for such purpose bear and pay all expenses and fees, legal and otherwise in connection therewith; and
    Whereas, said conveyance is based on an estimated acreage of 1577.5 acres, made up as follows:
    A tract of ninety-two (92) acres, a tract of sixty-five and one-half (65-½) acres; a tract of ninety-five (95) acres; a tract of five hundred and thirty-one (531) acres; and a tract of seven hundred and ninety-four (794) acres, in tracts, 1, 2, 3, 4, and 5, respectively.
    Therefore, it is further agreed, that should either party desire the acreage in any one or more of said tracts to be correctly ascertained by actual survey such party may, within one year from this date, request that such survey of said tract or tracts of land be made, and in such case it is agreed that such survey shall be made by John C. Child, surveyor, and the correct acreage in the tract or tracts surveyed and ascertained by him, or, in case the said Child cannot be secured to make said survey, then that it be made by some other surveyor to be agreed on mutually by the parties hereto, and in case the parties cannot agree upon a surveyor to make such survey, then it shall be made by two surveyors, one to be selected by each party, and it is agreed that whatever acreage may be ascertained by such survey, however made, in accordance with this agreement, shall be accepted by the parties hereto in adjusting and paying the purchase money; and in case the acreage in any of said tracts shall be reduced as the result of such survey, or should the title of the first party fail or be defeated as to any part thereof, then credit shall be given to the party of the second part upon the last of said purchase money notes for the price of the acreage so reduced or lost, at the rate of forty-five Dollars ($45.00) per acre, and should the acreage be increased by such survey, then the price of such increased or additional acreage shall be added to the last of said purchase money notes at the said rate of Forty-five Dollars ($45.00) per acre; such increase to be considered as if it had been included in said note at the time said note was given.
    The party of the first part also agrees to pay all costs, expenses and fees, legal and otherwise, in the defense of the title to said land incurred before the payment of all of said deferred purchase money, but it shall also have the right and privilege of conducting all such litigation for second party if it elects so to do.
    In further consideration thereof, it is agreed that the party of the second part may secure the release of the vendor’s lien reserved in said deed on the tract containing 794 acres, or any part thereof, at any time before the maturity of said notes, by paying to the party of the first part for such tract in full or for such part thereof as he desires to have released from said vendor’s lien, at the rate of forty-five dollars ($45.00) per acre, with interest from the date of said purchase money notes. And the amount so paid shall be credited upon the first of the Ten Thousand Dollar ($10,000.00) notes set out in said deed maturing after such payment, provided all notes which have matured before that date have been fully paid and discharged; and provided further, that in ease the said party of the second part desires to pay for a part of said tract of 794 acres, he shall have such part laid off in such way as that it shall leave the residue of said tract so situated and located as to be of at least equal value per acre with that so paid for, as aforesaid, and in such manner as shall not render the remaining portion of said 794 acres less accessible than it now is.

      The total acreage comprising the five tracts was subsequently reduced to 1,231 acres, because of defective titles and other adverse conditions. Which, and to what extent, each of the five tracts were affected is not shown by the record. On August 8, 1919, the Circuit Court for the County of Boone entered a decree quieting title to-114.10 acres, comprising a part of tract No. 5.
    On May 13, 1919, the taxpayer granted to the Carter Oil Co. five separate leases covering the five tracts hereinbefore described. The pertinent provisions of these leases, all of which are printed and similar in form, are as follows:
    This Agreement, Made the 13th day of May, A. D. 1919 between The Nelson Land & Oil Company, a corporation organized and existing under the laws of the State of Maryland, Lessor, and The Carter Oil Company, Lessee.
    Witnesseth, That the Lessor, in consideration of one dollar, and other good and valuable consideration, in hand paid by the Lessee, receipt of which is hereby acknowledged, and of the convenants and agreements hereinafter contained, hereby grants and warrants specifically the title to, all the oil and gas in and under, and grants, demises and leases, with convenants of quiet possession, and of sole right to convey, all that certain tract of land hereinafter described, for the sole and only purpose of operating for and producing oil, gas and gasoline, together with rights-of-way and servitudes for pipe lines, telephone and telegraph lines, structures, houses and buildings for employees, and all other rights and privileges necessary, incident to and convenient for the economic operation of this land alone and conjointly with neighboring lands for oil, gas and gasoline, with the right to use free oil, gas, gasoline and water for such purposes, and with the right of removing either during or after the term hereof all and any property and improvements placed or erected on the premises by Lessee; also with the right of operating as one entire tract or of sub-dividing the premises situate in Sherman District, Boone County, and State of West Virginia, bounded and described as follows [description] :
    To have and to hold unto and for the use of the Lessee for the term of five years from the date hereof and as much longer as oil, gas or gasoline is produced in paying quantities, yielding to the Lessor the one-eighth part of all the oil produced and saved from the premises, delivered free of expense to the Lessor’s credit into tanks or pipe lines and, before such delivery, unaffected by any subsequent division or partition of the premises.
    Should gasoline be manufactured from casing-head gas produced from oil wells on the premises hereby leased, the Lessor shall receive, in full payment for such gas, one-eighth of the surplus gasoline thus manufactured and saved, delivered in tanks provided by the Lessee on the premises, free of expense, or one-eighth of the proceeds, less the cost of marketing the same, payable to the Lessor semi-annually. The gasoline manufactured from casing-head gas produced on the premises hereby leased may be apportioned among several farms, according to the number of wells on each producing and supplying gas to the gasoline plant or plants.
    Should a well be found producing gas only, then the Lessor shall be paid for the gas produced from each such gas well at the rate of one cent for every 1000 cubic feet of gas sold therefrom, payable quarterly while so marketed.
    Lessee agrees to complete a well on said premises within six months from the date hereof or thereafter pay the Lessor twenty three dollars each three months in advance from the 13th day of November, 1919, until said well is completed, or this lease surrendered. The drilling of a non-productive well shall be accepted by the Lessor in lieu of delay rental for a period of one year, at the end of which time, the Lessee shall resume the payment of delay rental or commence a second well. And the drilling of a second well, productive or otherwise, shall be full consideration to the Lessor for the grant hereby made to Lessee with exclusive right to drill one or more additional wells on the premises during the term of this lease.
    The rents and royalties herein reserved shall include any rentals or royalties or interests in the oil and gas that may have been heretofore sold, reserved or conveyed by the Lessor or his predecessors in title. If Lessor does not have title to all the oil and gas under the above described premises, he agrees, on demand made, to refund the delay rental paid, or to refund and release from further payment the part thereof proportionate to the outstanding interest or title.
    Lessor is to fully use and enjoy said premises for the purpose of tillage, except such parts as may be used by Lessee for the purpose aforesaid. Lessee is not to put down any wells on the land hereby leased within ten rods of the buildings now on said premises without the consent of the Lessor in writing. Nothing herein contained shall operate to prevent Lessee from removing its equipment and abandoning any well at any time.
    The above rental shall be paid to Lessor in person or by check made payable to and deposited in the Post Office directed to The Nelson Land & Oil Company, Charleston, W. Va.
    And it is further agreed that the Lessee shall have the right to surrender this lease at any time upon payment of one dollar and all amounts due hereunder, and thereafter shall be released and discharged from all payments, obligations, covenants and conditions herein contained, whereupon' this lease shall be null and void; and that all conditions, terms and limitations between the parties hereto shall extend to their heirs, successors, personal representatives and assigns.
    Also, on May 13, 1919, the taxpayer entered into a further agreement with the Carter Oil Co., the terms of which are as follows:
    Memorandum of agreement made and entered into this 13th day of May, 1919, by and between The Nelson Land & Oil Company; a corporataion organized and existing under the laws of the State of Maryland, and lawfully doing business in the State of West Virginia, party of the first part, and The Carter Oil Company, a corporation, party of the second part:
    Whereas, by deed bearing date the 29th day of April, 1919, the party of the first part has acquired from the Boone Coal Land Company certain rights and interests in five several tracts of land situate in Sherman District, Boone County, West Virginia, and containing respectively, ninety-two acres, sixty-five and one-half acres, ninety-five acres, five hundred and thirty-one acres, and seven hundred and ninety-four acres, and known as Tracts Nos. 1, 2, 3, 4 and 5 respectively; which said lands, or such of them as to which the party of the first part shall have a good and valid title, the party of the second part desires to lease for oil and gas purposes; and
    Whereas, such leases for oil and gas purposes have been drawn, executed apd acknowledged by said party of the first part, covering said five several tracts of land above referred to, and are now ready for delivery as soon as the title thereto is approved by attorneys of the second part:
    Now, therefore, this agreement

      Witnesseth: That the said parties hereto, in consideration of the premises, and in further consideration of the sum of One Dollar ($1.00) cash in hand paid by each of the said parties to the other, the receipt of which is hereby acknowledged, do hereby promise, covenant and agree with each other as follows:
    First, that the said party of the second part shall pay to the party of the first part as a bonus for the leases aforesaid, the sum of Twenty Dollars ($20.00) per acre for all of said five tracts of land or so much thereof as the attorneys of the said party of the second part shall approve the title to the oil and gas underlying the same, except that in event said attorneys of the said second party shall not approve the title to either lot 1, 2 or 3, it shall not be bound to take the lease on either lot 4 or 5, but if the title shall be approved to any one of said lots 1, 2 or 3, said second party shall also take the leases on lots 4 and 5, provided the title to the same is approved by the attorneys of said second party.
    It is hereby agreed that the five leases aforesaid, properly executed and acknowledged, shall be deposited with the Kanawha Banking & Trust Company of Charleston, West Virginia, and the party of the second part shall likewise deposit with said bank forthwith, an amount equal to the total bonus of Twenty Dollars ($20.00) per acre for all of the said five tracts of land, aggregating 1,577.5 acres; and said respective leases shall be delivered to the second party upon acceptance of title to any one or more of said tracts, and the payment of said bonus of Twenty Dollars ($20.00) per acre for such tract. The second party shall have thirty days in which to abstract title to said several tracts and check up the location thereof on the ground and to accept said leases.
    All of said leases, the title of which shall be approved by the attorneys of the second party, shall be accepted and said bonus paid within thirty days, and in the event that the title to either lots 1, 2 or 3 shall be approved by the attorneys of said second party, the said second party shall have a reasonable time, after the expiration of said thirty days, within which to secure and make corrections in the titles to the lots, the title or titles to which are not approved, and so that the same may be approved and taken hereunder.
    Second. In event that the title to the oil and gas underlying, any of the said five tracts of land, or any part thereof, shall not be approved by the attorneys of the-said second party within said thirty days, the bonus money deposited in bank as aforesaid, covering said acreage, shall be returned to the party of the second part, but in event of further time for correction of title under the last paragraph of section First the bonus money covering same shall remain in escrow under the terms and conditions hereof.
    Third. It is further agreed that in the event said party of the second part shall accept said leases on tracts 1, 2, or 3 aforesaid, or any of them, or any part thereof, it will commence the drilling of a well thereon within sixty days from the date of delivery of the lease to it, and will drill the same to completion with due diligence, unavoidable accidents and delays alone excepted, and upon failure to commence such well within sixty days from date of delivery shall forfeit all rights of said party of the second part under said leases and each of them.
    Fourth. It is further understood and agreed by and between the parties hereto that although said party of the second part by the terms and conditions of said leases has covenanted and agreed to pay a delay rental of One Dollar ($1.00) per acre per annum, payable each three months in advance, from November 13, 1919, that the drilling of a well by said party of the second part ■on the lands described in said leases shall nevertheless stop the delay rental •of Two Hundred (200) acres of land, and that the terms and conditions of said oil and gas leases, in event of the acceptance thereof by said party of the second part shall be modified by this agreement in that respect and to that extent.
    Fifth. For further certainty there is hereto attached a map showing the general location of the five tracts herein referred to, as numbered 1, 2, 3, 4 and 5.
    Sixth. The mutual covenants and considerations herein mentioned and expressed constitute the consideration of this agreement, and also part of the consideration for the execution of the five leases above mentioned, and are included in the “ other good and valuable considerations ” mentioned in said leases respectively; and said leases and this agreement shall be taken and read together as forming one entire contract, except that where a conflict may occur, the provisions hereof shall prevail.
    Pursuant to the provisions of the foregoing agreement, the taxpayer received from the Carter Oil Co. within the year 1919, as a bonus of $20 per acre, the net sum of $19,879. The taxpayer included no part of this sum in income in its return for 1919, because of a ■belief that it constituted a return of capital and, therefore, was not subject to taxation. The amount in question was added to income for 1919 by the Commissioner for the reason, as stated in the deficiency letter of November 19, 1924, the “ Information furnished regarding the sale of lease is incomplete and can not be accepted by this office [Commissioner’s] in determining profit or loss on sale.”
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Marquette

: The sole issue presented by this appeal is whether or .not the amount of $19,879 received by this taxpayer in 1919 from the Carter Oil Co., as a bonus for the leases granted to that company by the taxpayer, constitutes taxable income, or a return of capital and not subject to taxation. As pointed out in our findings of fact, the amount in question was added to the taxpayer’s net income by the Commissioner for lack of sufficient information upon which to determine to what extent, if any, this item was subject to taxation. But the issue comes before us on its merits, the parties to the issue entertaining diametrically opposed views.

The taxpayer contends that the five leases granted to the Carter Oil Co. under date of May 13, 1919, together with the agreement of ■ even date, constituted, in substance as well as in fact, sales of the oil and gas in place; that mineral leases are in effect conveyances of mineral properties, because by operation under lease the subject . matter of the lease is vacated, and, accordingly, the owner’s right, title, and interest in such properties acquired by deed for a definite-consideration becomes exhausted; that the consideration under the-lease becomes the purchase price of the subject matter of the lease; and that, before gain is determined by the disposition of property, there must be a return of capital outlay in the acquisition of such property. The taxpayer calls our attention to what it believes to be an apparent inconsistency on the part of the Commissioner in this matter with his view as otherwise expressed in article 215 of Regulations 45, which, so far as it is pertinent to the issue under consideration, reads as follows:

Art. 215. Depletion. — Adjustments of accounts based on bonus or advanced royalty. — (a) Where a lessor receives a bonus or other sum in addition to royalties, such bonus or other sum shall be regarded as a return of capital to the lessor, but only to the extent of the capital remaining to be recovered through depletion by the lessor at the date of lease. * * * (Italics ours.)

On the other hand, the Commissioner contends that the five leases and the supplemental agreement of May 13, 1919, conveyed no title to the oil and gas in place to the Carter Oil Co.; that the instruments in question merely conveyed to the Carter Oil Co. the right to enter upon the lands and explore for oil and gas; and that the taxpayer, so far as its capital was concerned, had divested itself of nothing, but, on the contrary, was in the same position immediately after granting the leases as it was before; hence, the amount of the bonus received from the Carter Oil Co. was taxable in full and can not be regarded as a return of capital.

The Commissioner further contends that article 215 of Regulations 45 is not applicable to the facts in this case, pointing out that the provisions of that article are limited to advance royalties and bonuses paid on oil and gas wells that are actually producing at the time of the granting of the leases.

We are unable to adopt the view vigorously pressed upon us in. argument by counsel for the taxpayer that the instruments executed by it to the Carter Oil Co. are conveyances of the fee simple title-to the oil and gas in place, and therefore that the transaction, of which these instruments are evidence, constituted, in fact and in substance, a sale of minerals. The instances in which absolute-conveyances of oil and gas are made upon conditions requiring development for the mutual benefit of grantor and grantee are-extremely rare, and it is to be presumed that the parties did not intend such a conveyance, unless the terms of the instruments so clearly indicate it that a contrary intention can not reasonably be-deduced therefrom. Toothman v. Courtney, 62 W. Va. 167; 58 S. E. 915.

As is generally the custom in the drafting of oil and gas leases,, the instruments we are considering here, in the granting part. thereof, contain language generally regarded as appropriate and sufficient to accomplish the very thing which the taxpayer would have us regard as the substance of the transaction of which these instruments are the evidence. The leases set forth that the grantor “ warrants specifically the title to all the oil and gas in and under, and grants, demises and leases, with covenants of quiet possession, and of sole right to convey * * But we find in these instruments other language which clearly discloses the limitations upon the grants. The language “ to have and to hold unto and for the use of the lessee for the term of five years from the date hereof and as much longer as oil, gas or gasoline is produced in paying quantities,” together with other provisions found in the instruments, reveals their real nature. The great weight to which this time limitation is entitled is augmented by that clause of the agreement ■of May 13,1919, which by express provision is made part and parcel of the leases, which imposes upon the grantee, as a condition to the continuance of the estate, the payment of a yearly rental for delay in drilling a well; and the further clause in the leases yielding to the grantor the one-eighth part of the oil produced, delivered into tanks or pipe lines for the benefit of the grantor. These provisions are strongly indicative of a lease.

Though the words “ demise ” and “ grant ” embrace a fee, where they appear in instruments of the character of those here under consideration, their general significations are reduced and limited and they are used only to import to the agreements implied covenants on the part of the lessor of good right and title to make the leases, and an implied covenant of quiet enjoyment.- In the case of Toothman v. Courtney, supra, the court had under consideration the contention that an instrument executed by Toothman was not a lease but a conveyance of the fee simple title to the oil and gas. The instrument there under consideration is strikingly similar to those in the case at bar, and, after reviewing carefully the language used, the court held:

In the granting part thereof it uses terms technically efficacious and appropriate for the accomplishment of such a result, and, if they were not limited and restrained by other language and provisions, the instrument could not be held to be a lease. Though words of absolute conveyance are used, the habendum limits them. * * * However long the term, an estate for years is not a freehold.

In the case of Smith v. Root, 66 W. Va. 633; 66 S. E. 1005, it appeared that one Hall and wife executed an oil and gas lease to Goff and Heck, bearing date of February 29, 1904, and the defendants claimed under a contract made by said Halls to one Thornily, dated June 27, 1905. The lease to Goff and Heck was to remain in force for 10 years, and as much longer as either oil or gas should be produced. Through various assignments this lease came into the possession of one Smith on February 6, 1906. Before this date, however, five quarterly rentals were past due and the Halls had refused an extension of time. In the meantime, and before the lease had come into the possession of Smith, the Halls had executed a second lease to Thornily. Smith brought suit to enjoin the defendants from operating on said land and from removing and disposing of the oil, and to have the second lease canceled as constituting a cloud upon his title. The lease, except for some unimportant variations in language, was practically identical with the leases here under consideration, and in the course of its opinion sustaining the decree of the lower court, which was adverse to the plaintiff, the court stated as follows:

This contract, commonly called an oil and gas lease, did not invest Goff and Hecli with any estate in the oil and gas in place; it simply gave them the exclusive right to make exploration upon this land for oil and gas. Their right was simply an inchoate right, not a vested estate in land. The lease is an exec-utory contract in the nature of a license to enter upon the land and make exploration for oil and gas for a period of ten years, and longer if oil or gas should be discovered, and to extract them from the earth. No estate could vest until discovery.

Again, in the case of Lowther Oil Co. v. Miller-Sibley Oil Co., 53 W. Va. 501; 44 S. E. 433, the same court held:

An ordinary oil lease, making the lessee pay a consideration, binding him te-sóme obligation, vests only an inchoate right — that is, right to explore for oil — but no actual other estate than right to develop; and, if he gets no oil, he still has no vested estate, but if he does get oil, he has a vested estate. Such a lease calls for the right, not to oil in place, but to extract it. Steelsmith v. Gartlan, 45 W. Va. 27, 29 S. E. 978; Lowther Oil Co. v. Guffey, 52 W. Va. 88, 43 S. E. 101; Bryan on Petro. & Gas, 174, citing Venture Oil Co. v. Fretts, 152 Pa. 451, 25 Atl. 732; Colgan v. Oil Co., 194 Pa. 234, 45 Atl. 119.

That oil and gas in place may be made the subject matter of conveyance, so as to pass fee simple title thereto, seems fairly well established by all of the West Virginia cases cited above. See also State v. Low, 46 W. Va. 451; 33 S. E. 271; Ohio Oil Co. v. Indiana, 177 U. S. 190. But the intention of the parties to so convey title to oil and gas in place must be so clearly indicated by the terms of the instruments that a contrary intention can not reasonably be deduced therefrom. In the exposition of deeds the construction must be upon the view and comparison of the whole instrument, and with an endeavor to give every part of it meaning and effect. See Devlin on Deeds, section 837, and the long list of cases cited there.

Our conclusion is that the instruments under consideration are leases, vesting in the Carter Oil Co. only a right of exploration and production on the usual royalty terms, and that no estate was granted in the oil and gas in place.

Counsel for taxpayer in bis brief devotes considerable argument to the proposition that the grants made under the leases constitute such a -sale of rights as to bring the transaction, evidenced by the leases and agreement, within the scope of section 202 (a) of the Revenue Act of 1918, as a sale or other disposition of property, and that only the excess of the consideration received over the cost of the rights disposed of can be subjected to taxation. With this proposition we can not agree. So far as it relates to the sale or disposition of the rights pertaining to the oil and gas underlying the lands with respect to which the taxpayer acquired the fee simple title, we believe the proposition is disposed of by the decision of this Board in the Appeal of William Robert Farmer, 1 B. T. A 711. Nor do we believe any different rule should be applied to the proposition as it relates to the rights to the oil and gas in place acquired by the taxpayer from the Boone Coal Land Co.

Taxpayer calls our attention to what it believes to be an apparent inconsistency in the Commissioner’s action in the issue before us with his attitude as otherwise expressed in article 215 of Regulations 45, which provides that a bonus received by a lessor in addition to royalties, as a consideration for granting the lease, shall be regarded as a return of capital to the extent of the capital remaining to be recovered through depletion by the lessor. The inconsistency appears to us to be quite real. But, answers counsel for the Commissioner, “The article is applicable only to royalties and bonuses on oil and gas wells that are producing. Thus the ‘ bonus ’ referred to in the article can have no application to rentals paid under leases to explore for oil and gas.” Why the distinction, we are unable to comprehend; and that such distinction has not been the policy of the Commissioner in the past is apparent from examination of memorandum 3399 of the Solicitor of Internal Revenue, IV-1 C. B. 167, wherein the solicitor, after quoting article 215 of Regulations 62, identical with the same article of Regulations 45, stated: “The ‘bonus or other sum in addition to royalties’ mentioned in the above-quoted article is considered to be the price paid for the right to explore for and extract oil or mineral.” (Italics ours.)

However, after a searching examination of the statutes, we are unable to find any statutory warrant which affords a sound basis for such distinction. Why a “bonus or other sum in addition to royalties” forming a part of the consideration for the lease should be regarded as a return of capital any more than the royalties is beyond our comprehension. It would be just as logical to hold that the royalties, to the extent of the capital remaining to be recovered by the lessor, constitute a return of capital. The method prescribed by the statute of returning to a corporate taxpayer its capital investment, free from taxation, is through the depletion allowance provided for by section 234 (a) (9) of the Revenue Acts of 1918 and 1921. A bonus paid under such circumstances is as much a part of the consideration as the royalties. It is in fact and in substance a part of the royalties. Of particular interest in this connection is the decision of the United States Supreme Court in the case of Work v. United States ex rel. Mosier, 261 U. S. 352. This case reached the Supreme Court on a writ of error bringing up for review a judgment of the Court of Appeals of the District of Columbia, affirming a judgment of mandamus against the Secretary of the Interior commanding him to pay to the relators all the moneys due their minor children, members of the tribe of Osage Indians of Oklahoma, including their respective shares of bonus moneys paid the Secretary for oil leases made by the tribal council. Mr. Chief Justice Taft, in delivering the opinion ■of the court, said in part as follows:

Tho bonus which was the result of bidding for desirable and profitable oil and gas leases secured for the members of the Osage Tribe the just value ■of the use of their property which the fixing of royalties in advance by the President was not adapted to give them. It was in effect a supplement to the royalties already determined. It was really part of the royalty or rental in a lump sum or down payment. We do not see how it can be classified as anything else. It was income from the use of the mineral resources of the land. Of course, it involved a consumption and reduction of the mineral value of the land, but so does a royalty. This is an inevitable characteristic •of income from the product of the mine.

True, the question before the court in the above case involved a construction of the Act of June 28, 1906, entitled, “An Act For the division of the lands and funds of the Osage Indians in Oklahoma Territory, and for other purposes,” and the taxing statutes were not involved. But can there be any distinction in principle between the question there before the court and the question confronting us % On what possible theory could it be held that a bonus, forming a part of the consideration for a lease, is anything else than a part of the royalties ? None suggests itself to our minds. In the case of the United States v. Biwabik Mining Co., 247 U. S. 116, involving the question as to the right of the lessee, in computing its taxable net income, to take a deduction for depletion under the Act of August 5, 1909, the Supreme Court, in the course of its opinion, held that the sum paid by the defendant for the lease in addition to the royalties stipulated for therein “ may properly and justly be considered a payment in advance of an increased royalty on ore to be mined •* *

In view of the foregoing, we are of the opinion that sums in •addition to royalties, paid by a lessee to a lessor as a bonus for the granting of a lease, constitute taxable income.


author: Graupner:

text:
    Appeals of GEORGE W. TODD and LIBANUS M. TODD.
    Docket Nos. 2959 and 2960.
    Submitted October 1, 1925.
    Decided January 14, 1926.
    Deductible losses and taxable gain determined.

      Thomas J. Hargrave, Esq., for the taxpayers.

      L. O. Mitchell, Esq., for the Commissioner.
    Before Graupner and Phillips.
    These appeals are from determinations of deficiencies in income tax for the calendar years 1919, 1920, and 1921, as follows:
    George W. Todd_$3,002.64
    Libanus M. Todd_ 4,793. 05
    In each case only about $700 of the deficiency asserted is in controversy. The facts in both cases are identical.
    FINDINGS OF FACT
    1. On August 15, 1907, each of the taxpayers purchased 25 shares of common stock of the Baltimore & Ohio Railroad for $2,281.25. These shares had a fair market value on March 1, 1913, of $2,518.75. They were sold in 1919 for $1,714.67.
    2. On December 13, 1912, each of the taxpayers bought 50 shares of preferred stock of the Great Northern Railroad for $6,750, and on December 23, 1912, purchased 25 shares of the same stock for $3,375. On March 1, 1913, the block of 50 shares had a fair market value of $6,325, and the 25 shares a value of $3,162.50, or a total value of $9,487.50. All of the stock was sold in 1919 for $7,257.
    3. On July 6, 1910, the taxpayers each purchased 50 shares of Union Pacific Railroad common stock for $7,806.25. This stock had a fair market value on March 1, 1913, of $7,625, and was sold in 1919 for $6,685.
    4. In 1912 each of the taxpayers purchased 5 shares of stock of the Genessee Investment Co., for $500. This corporation was dissolved in December, 1920. At the time of its dissolution it had no assets and has never paid a liquidating dividend to its stockholders. The stock became worthless in 1920.
    5. In 1920 the taxpayers each acquired stock of the Arizona Cave Creek Mines Corporation at a cost of $250. This corporation was organized under the laws of Arizona and was engaged in the mining business. It ceased operations early in 1920 and at that time had no assets. It has never paid a liquidating dividend and still owes franchise taxes. The stock became worthless in 1920.

      6. In October, 1919, each of the taxpayers acquired stock in the Texas and Pacific Oil Syndicate at a cost of $250. This syndicate was formed for the purpose of financing the drilling of oil wells. The wells proved to be dry and in 1921 it was learned by the taxpayers that the syndicate had been dissolved. The stock became worthless in 1921.
    7. In June, 1918, the taxpayers purchased stock in the Bochester Sterling Groceries, Inc., at a cost to each of $1,000. At a meeting of the stockholders held on April 15, 1921, a majority voted for the dissolution of the corporation, which thereupon ceased operations. The company paid a part of its liabilities but has never liquidated its stock.
    8. In October, 1920, the taxpayers purchased bonds of the Grand Trunk Kailroad at a net cost to each of $4,975. The bonds were sold in 1921 for $5,085.
    9. In 1920 each of the taxpayers purchased stock in the Lance Creek Boyalties at a cost of $63.75. In 1921, there was practically no market for this stock.
    10. In March, 1920, the taxpayers each acquired bonds of the City of Berlin, Germany, payable in marks, at a cost of $162.50. In 1921 German marks had almost ceased to be of value and the amount which could have been realized from a sale would have amounted to no more than the commission. Consequently, each of the taxpayers wrote the amount off as a loss.
    DECISION.
    The deficiencies should be computed in accordance with the following opinion. Final determination will be entered on 10 days’ notice, in accordance with Bule 50.
   OPINION.

Graupner:

The conclusions which we draw from the evidence in this appeal are that each taxpayer has sustained deductible losses and realized a taxable gain as set out in the following table:

With respect to the stock of the Rochester Sterling Groceries, Inc., there is no evidence to show whether or not the company had assets remaining at the time of its dissolution. The same situation exists with respect to the stock of the Lance Creek Royalties Co. Consequently, we can not hold that the stock was without value, as the taxpayers contend. There is no evidence as to the date of maturity of the bonds of the City of Berlin or that such bonds were subject to call or were called in 1921. Therefore, we can not hold that the taxpayers were entitled to deduct the cost thereof during that year.


author: Trammell:

text:
    Appeal of SPENCER PENROSE.
    Docket No. 2982.
    Submitted November 5, 1925.
    Decided January 14, 1926.
    Letter appealed from held, not a deficiency letter.

      M. 0. Elliott and G. O. Hamlin, Esqs., for the taxpayer.

      A. Oalder Maclcay, Esq., for the Commissioner.
    Before Phillips and Trammell.
   Trammell:

This appeal came on for hearing on motion of the Commissioner to dismiss for want of jurisdiction of the Board upon the grounds: (1) That the taxpayer in his petition is not appealing from a deficiency determined subsequent to the enactment of the Revenue Act of 1924; (2) that the letter of February 17,1925, which is attached to the petition as the deficiency letter, is merely a statement by the Department of its position with respect to the assessment theretofore made and is not a statement of the determination of the Commissioner; and (3) that the petition merely calls for the determination by the Board that the assessment for 1917 is barred by the statute of limitations and does not ask for a determination of the deficiency.

The taxpayer, on or about March 15, 1918, filed his return for 1917 showing a tax liability for that year in the amount of $250,-546.53, which was duly paid. In December, 1918, the Commissioner assessed additional taxes for 1917 of $55,909.04, which assessment was forwarded to the collector of internal revenue at Denver, who notified taxpayer on February 15, 1919, of the additional assessment, On February 22, 1919, taxpayer filed a claim for the abatement of $55,211.70 of the additional tax assessed and made payment of the balance. The claim for-abatement was duly considered, and in September, 1919, taxpayer was notified by the Commissioner that it would be allowed to the extent of $11,188.25 and rejected for $44,023.45. No formal certificate of overassessment appears to have been issued. Upon request of the taxpayer the claim for abatement was given further consideration by the Commissioner, and in a letter dated March 7, 1924, the Commissioner advised the taxpayer that the claim for abatement would be rejected for the reason that a reexamination of the return disclosed a tax liability in excess of the amount assessed. In a letter dated March 11,1924, the taxpayer was advised that a reexamination of the return indicated a liability for 1917 in the amount of $47,305.29 in excess of all sums previously assessed and that, since the five-year period provided in section 250 (d) of the Revenue Act of 1921 within which assessments of additional tax for 1917 might be made had expired, no assessment of the additional amount of $47,305.29 for that year could be made, unless a waiver was signed consenting to a redetermination of the tax liability, and the taxpayer was advised that he would be given an opportunity to present exceptions to any adjustments made before the additional assessment was made, provided the waiver was filed.

In December, 1924, the claim for abatement of $55,211.70 was rejected iif full and the collector was notified to collect the amount assessed with interest. The collector thereafter, on January 15, 1925, notified taxpayer of such rejection and demanded payment of such assessment of $55,211.70, with interest in the amount of $27,288.

On February 17, 1925, the Commissioner wrote a letter to an attorney, who represented the taxpayer, in response to a letter from such attorney, dated January 22, 1925, and advised him of the basis ■ for the rejection of the claim for abatement. Since this letter is referred to by the taxpayer as the deficiency letter from which the appeal is taken, it is quoted in full as follows:

Reference is made to your letter dated January 22, 1925, in regard to the 1917 return filed by Spencer Penrose, Colorado Springs, Colorado.
Relative to tbe deficiency in tax of $47,305.29 of wbiclt Mr. Penrose was notified in an office letter dated March 11, 1924, you are advised that since this deficiency was not determined until more than six years from the time that the return was filed and since Mr. Penrose did not choose to sign a waiver or pay the tax, as suggested by this office, the assessment of this amount is barred by the Statute of Limitation.
Regarding your question as to whether the Department can collect that portion of the abatement claim, in the amount of $11,188.25 which should be allowed but which is rejected at this time upon the grounds of the taxpayer’s liability for additional tax, the assessment of which is now barred by the statute, your attention is called to Law Opinion 1080, Cumulative Bulletin #5, Page 246.
In this ruling it states in part that the validity of an assessment depends upon the law and actual facts existing. The amount of the tax depends upon the true statutory net income. Therefore an assessment made by mistake or upon items erroneously included may not be abated or remitted because so made if, at the time its validity is passed upon, this office is in possession of evidence which shows that an equivalent or greater amount of tax is properly due in connection with the income upon which the assessment was predicated. The fact that the statute of limitation had run would not affect its existence. This would preclude the Bureau from abating any portion of the additional tax of $55,211.70 for which the abatement claim was filed.
The records of this office indicate that the notice received by Mr. Penrose of a tax due amounting to some $80,000.00 represents the deficiency of $55,-211.70 which was assessed within the statutory period, plus the interest due thereon as computed in the office of the Collector.
Respectfully,
(s) C. B. Allen,
Acting Deputy Commissioner.

The above letter is in no sense the determination by the Commissioner of a deficiency in tax. It is merely an explanation to the taxpayer’s counsel of the action of the Commissioner theretofore taken. It does not indicate that the Commissioner had reconsidered his former action or that he was at that time determining any tax liability.

Without passing upon any other jurisdictional question raised, it is sufficient to saythat the appeal was not taken within 60 days from the determination of a deficiency by the Commissioner. The letter of February 17, 1925, did not advise the taxpayer of a deficiency in tax. This being true, the Board is without jurisdiction to hear and determine the appeal. The appeal is dismissed.


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    Appeal of LAURENS TRUST CO.
    Docket No. 3930.
    Submitted July 10, 1925.
    Decided January 14, 1926.

      Wilton H. Wallace, Esq., and B. G. Wallace, G. P. A., for the taxpayer.

      M. N. Fisher, Esq., for the Commissioner.
    Before James and Trussell.
    This is an appeal from the determination of a deficiency for the year 1920 in the amount of $1,512.93. The issues in the appeal deal with the determination of the amount of taxable gain derived from the sale of certain real estate, and with the question as to whether or not certain debts were ascertained to be worthless during the taxable year.
    FINDINGS OF FACT.
    The taxpayer is a South Carolina corporation with its principal place of business at Laurens.

      During the year 1920, the taxpayer charged off the following accounts, which in that year it had ascertained to be worthless:
    Morgan H. Grace-. $3». 78
    J. S. Blakeley_ 5.00
    E. T. Taylor_ 22.00
    AY. E. AVells_ 25.00
    John Torborough_ 4, 060.87
    AY. C. Knight_ 2, 000. 00
    O. L. Phillips_ 6, 512.52
    T. B. Smneral_ 12,113.00
    B. A. Sullivan_ 1,258. 94
    R. E. Elemming_ 7, 912.71
    Elemming Brothers. 1, 843. 65
    G. AY. Hendricks_ 525.00
    Roy Holland_ 1,177.80
    L. H. Boland_ 2, 006. 80
    J. H. Bagwell_ 1, 562.30
    Total 35, 939. 68
    [41, 056. 37]
    In addition to the items above listed, the taxpayer also charged off accounts designated as follows: John Smith farm sale, $168.87; Laura Parker, $200. The account of $168.87 represents the balance due on the purchase price of a piece of property known as the Smith farm.
    During the year 1920, the taxpayer sold certain tracts of real estate. One tract, known as the Simpson land, sold for $56,559.14,. of which amount $2,247.50 was paid in cash, the remainder being secured by a mortgage on the property. The cost of the land to the taxpayer was $40,872.98. This property was turned back to the-taxpayer in the fall of the same year. Another tract of land, known as the Bolt land, was sold for $6,773.08, of which amount $400 was. paid in cash, the remainder being secured by mortgage. This; property cost the taxpayer $4,677.50. A third tract of land was sold for $5,380, $1,000 of which was paid in cash. The cost of this tract of land to the taxpayer is not shown. On all of these sales the-taxpayer paid a commission of 5 per cent on the sale price.
   DECISION.

In computing the deficiency in this appeal, bad debt deductions; should be allowed in the amount of $35,939.68, and there should be-included in gross income derived from the Simpson land transaction only the amount of the cash payment of $2,247.50. Otherwise, the, determination of the Commissioner is approved. Final determination will be settled upon 15 days’ notice, pursuant to Rule 50.


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    Appeal of JULIA BUILDING ASSOCIATION.
    Docket No. 1716.
    Submitted March 26, 1925.
    Decided January 14, 1926.

      F. W. McReqnoVds, Esq., for the taxpayer.

      B. H. Saunders, Esq., for the Commissioner.
    Before Jambs, SteRnhagen, Teammell, and Trussell.
    This is an appeal from the determination of a deficiency in income and profits tax for the year 1919 in the amount of $2,611.05. The only issue presented for the consideration of the Board is whether the taxpayer, a lessor under a 99-year lease, should be allowed to add the cost of a building constructed by the lessee to the lessor’s paid-in surplus and have the same treated as a part of the lessor’s invested capital.
    . BINDINGS OB PACT.
    The taxpayer is a corporation organized under the laws of Missouri, with its principal place of business at St. Louis.
    On or about the 30th day of June, 1905, the taxpayer entered into a lease with the Department Store Investment Co., by the terms of which the taxpayer (as lessor) leased a certain parcel' of land in St. Louis for a term of 99 years, at a rental of $76,000 for the first five years and $100,000 per annum for the remainder of the term of the lease. The lessee convenanted to erect a building on the premises, within 15 years, to cost at least $800,000, and to pay all taxes and assessments that may accrue against the property. The lease provided that the lessor become the owner of the building or buildings as erected, and the usual forfeiture clauses.
    In pursuance of the terms of said lease, the lessee erected a building in the year 1912, costing $2,777,733. During the year 1919 the lease was in full force and effect and the lessee was in possession of and using the premises under the terms of the lease.
    The said sum of $2,777,733 was entered upon the books of the taxpayer as an addition to surplus at the time the building was completed, and is now claimed as part of invested capital for the year 1919. The Commissioner refused to allow any part of the cost of said building for the purpose of computing invested capital, and, in a deficiency letter mailed December 4, 1924, asserted a deficiency of $2,611.05 for the year 1919.
   DECISION.

The determination of the Commissioner is approved.


author: Trussell:

text:
    Appeals of HARRY N. GIFFORD and LOUIS W. CULLUM.
    Docket Nos. 2677 and 2678.
    Submitted June 1, 1925.
    Decided January 16, 1926.
    1. In the ease of a tenant bolding and using premises under a lease from year to year where the landlord is a member of the tenant partnership, the cost of improvements and additions to buildings on leased premises and of removable machinery and equipment, charged to expense when made or acquired, may be restored to the tenant’s asset accounts for the purposes of invested capital, upon proof of the continued existence and use of such properties during the taxable year.
    2. A deduction for a loss of the par value of stock of a bankrupt corporation can not be allowed in the absence of proof of the cost of such stock when acquired after March 1, 1913.

      Fred S. Johnson, G. P. A., and Peter J. Vandebergh, O. P. A., for the taxpayers.

      B. G. Sim,pick,-Esq., for the Commissioner.
    Before James, LittletoN, Smith, and Tuttssell.
    These appeals involve deficiencies in income and profits taxes for the years 1917, 1919, and 1920, and overassessments for the year 1918, as follows:

    By agreement of counsel the appeals were tried together.
    FINDINGS OE PACT.
    Harry N. Gifford resides at Elgin, Ill., and Louis W. Cullum resides at Monticello, Ind.
    On March 15, 1912, J. P. Younger proposed to Gifford that they form a partnership for the purpose of engaging in the wholesale milk and cream business. Gifford advised Younger that such an arrangement would be agreeable to him, provided the partnership should include Cullum, with whom he had previously entered into a partnership agreement. Gifford had previously been engaged in the milk and cream business with Cornell Brothers, Inc.,-a corporation which had become bankrupt. It was thereupon orally agreed that the partnership of Younger, Gifford & Cullum should be formed and that 50 per cent of the profits should go to Younger, 25 per cent ' to Gifford, and 25 per cent to Cullum.
    On the same day Younger purchased from Elmer J. Fellows, trustee in bankruptcy for Cornell Brothers, Inc., 51 shares, or 51 per cent, of the capital stock of the Garden Prairie Creamery Co., a corporation owning the land and buildings in which Cornell Brothers, Inc., had carried on a milk and cream business. In addition to the shares of stock, Younger purchased from the trustee all of the machinery and equipment installed on the premises of the Garden Prairie Creamery Co. He also acquired a lease by the Garden Prairie Creamery Co. of its land and buildings to Cornell Brothers, Inc., for the period beginning July 26, 1904, and expiring on April 30, 1914. The lease provided for an annual rental of $1,150 and contained an option for renewal for a further period of ten years.
    The partnership of Younger, Gifford & Cullum commenced business on April 1, 1912, and continued as such until the death of J. P. Younger, on February 15,1919, during which time it continuously occupied the premises of the Garden Prairie Creamery Co. and conducted a wholesale milk and cream business thereon. The lease to the premises was not assigned to the partnership, but the annual rental of $1,150 was paid by the partnership. The premises were never occupied by Younger as an individual. For the use of the machinery, apparatus and equipment purchased from the trustee, the partnership paid to Younger $3,500 per annum.-
    Upon the expiration of the original lease, a new lease was executed direct to Younger for a period of 10 years, expiring April 30, 1924, for the same annual rental as was provided in the original lease. The rental under this lease was also assumed by the partnership. Both leases gave the lessee the right to remove any additions made by him, or in his behalf, to the property of the Garden Prairie Creamery Co., or to be compensated for such additions at a fair value, to be fixed by appraisals in the manner provided by the terms of the lease.
    The partnership made certain additions to the buildings of the Garden Prairie Creamery Co., the cost of which was paid from the funds of the partnership and by it charged to expense on its books as follows:
    rerioa. Amount.
    Year ended March 31, 1913-$1,475.00
    Year ended March 31, 1914- 8,062.18
    Year ended March 31, 1915- 430. 03
    Year ended March 31, 1917--- 213.50
    Total_10,180.71

      From time to time the partnership purchased personal and removable property in the nature of machinery, apparatus and equipment necessary for the proper conduct of its business. This equipment was installed on the premises of the Garden Prairie Creamery Co. The purchases were billed to the partnership, paid for by the partnership out of partnership funds, and charged to expense on the books of the partnership, as follows:
    Period. ' Amount.
    Year ended March 31, 1913_$3,969.26
    Year ended March 31, 1914- 17,430.93
    Year ended March 31, 1915- 339.60
    Year ended March 31, 1916_ 2, 736.39
    Year ended March 31, 1917_ 4,213.07
    Year ended March 31, 1918_ 3, 843.14
    Period ended Dec. 31, 1918_ 1, 331. 03
    Period ended Feb. 15, 1919_ 22. 00
    Total_ 33,885.42
    Upon the death of J. P. Younger, the partnership of Gifford and Cullum continued to operate the creamery business previously operated by the firm of Younger, Gifford & Cullum. In January, 1921, the taxpayers purchased from the heirs-at-law of J. P. Younger all the right, title and interest, which J. P. Younger owned during his lifetime and at the time of his death, in and to all property situated on the premises of the Garden Prairie Creamery Co. The purchase also included the 51 per cent of the capital stock of that company. The purchase price was $60,000.
    After the death of Younger, a schedule was filed with the probate court showing the personal property owned by the estate. The machinery and equipment previously purchased by the partnership and paid for from partnership funds was listed in this schedule item by item. There was also prepared from the partnership books a statement of the assets and liabilities of the partnership. This statement did not include any of the machinery or equipment or any additions to buildings paid for by the partnership and charged on its books to expense. This statement was signed and sworn to by Harry N. Gifford and Louis W. Cullum, as being a true statement of all of -the assets and liabilities of the partnership at the date of the death of J. P. Younger.
    Subsequent to that date, in the year 1922, an audit of the books of account of the partnership of Younger, Gifford & Cullum was made by accountants. This audit disclosed that the additions to buildings and the purchases of machinery, apparatus, and equipment, purchased and paid for by the partnership, had been charged off as expense items. As a result of the audit these items were restored to capital on the books of the partnership.

      The books of Younger, Gifford & Cullum were subsequently examined by revenue agents. In their report to the Commissioner, dated May 12, 1923, they stated that, inasmuch as the lease to J. P. Younger of the premises of the Garden Prairie Creamery Co. had not been assigned to the partnership, the partnership operated under a lease from year to year and, at the expiration of each year, title to any property installed on the premises by the partnership during that year vested in J. P. Younger, and such expenditures by the partnership were properly charged to expense instead of capital. The Commissioner has computed the tax of the partnership in accordance with the recommendations of the revenue agents, excluding from invested capital the value of the property and disallowing deductions claimed for its depreciation, resulting in a net increase in the distributive shares of the partners for the years involved in these appeals.
    On or about December 1, 1913, Cullum acquired 15 shares of the preferred stock of the American Real Estate Co. of a par value of $100 per share. About the same date a report was issued by the company showing preferred stock of $1,000,000 par value, and common stock of $100,000 par value outstanding; also surplus available for stockholders in the amount of $3,247,789.13. The total bonded indebtedness was shown as $13,650,000. On April 19, 1916, the assets of the company were taken over by trustees in bankruptcy. Reports were issued from time to time showing a decrease in the value of assets but no corresponding decrease in liabilities and, on June 30, 1920, a report was issued showing total assets in an amount smaller than par value of the bonds outstanding. It does not appear from the record that the receivership has as yet been wound up. Neither does the record show how the shares of stock were acquired nor the cost thereof, if any, to the taxpayer.
    On his return for the year 1919 the taxpayer deducted as a loss the par value of the shares of stock owned by him. This deduction was disallowed by the Commissioner.
    DECISION.
    The deficiencies should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, under Rule 50.
   OPINION.

Trussell:

The principal question involved in these appeals is whether or not certain improvements and additions to leased premises occupied by the partnership, Younger, Gifford & Cullum, of which the taxpayers were members, and certain machinery, apparatus and equipment were partnership assets, all of the items mentioned having been purchased with partnership funds and used exclusively in the partnership business. If these items were partnership assets, they should be included in invested capital for the purpose of computing partnership excess-profits tax for 1917, and the partnership is entitled to a reasonable allowance for the exhaustion, wear and tear of the property for all years involved in this appeal.

As a general rule, property purchased with partnership funds is presumed to belong to the firm. This is held to be true even though the title has been made to one of the partners or all of the partners individually. See Rowley on the Modern Law of Partnership, vol. 1, section 276. In Hoxie v. Carr, Fed. Cas. No. 6802, the court said that, where payment is made out of partnership funds for property necessary for the ordinary operation of the partnership business and*' the property is actually sq employed, the presumption that it belongs to the partnership will be decisive in the absence of countervailing circumstances. See also Fairfield v. Phillips, 83 Iowa, 571; 49 N. W. 1025; In re Minor, 11 Fed. 406; Deming v. Moss, 40 Utah, 501; 121 Pac. 971; and In re Welch, 137 N. Y. S. 941, 943.

In the instant case it is admitted by the Commissioner that the property in question was bought by the partnership and paid for out of partnership funds. It is contended, however, that, inasmuch as the lease to the premises occupied by the partnership was acquired by Younger, renewed in his name, and never assigned to the partnership by him, the partnership was nothing more than a tenant from year to year and all of the property installed on the premises during any one year passed to Younger at the expiration of such year. The Commissioner stresses the fact that the amounts expended for the property in question were charged off on the partnership books as expenses; also the fact that the property appeared item for item as the property of the J. P. Younger estate on the list filed with the probate court and did not appear on the list of partnership assets.

With these contentions we are unable to agree. The facts do not support such a conclusion. The lease to the premises of the Garden Prairie Creamery Co. was acquired by Younger immediately after the agreement was reached with reference to the formation of the partnership. The premises were never occupied by Younger as an individual, but were occupied continuously by the partnership, which assumed and paid the rent direct to the lessor. It thus appears that the lease was acquired for the use and benefit of the partnership, and, having assumed the burdens incident to the occupancy of the premises, it was entitled to any benefits accruing under the lease. .

In view of the provision in the lease which permitted the lessee to remove improvements made by such lessee during the term of the lease, or to be reimbursed therefor by the lessor upon termination of the lease, the partnership not only retained title to such improvements during the term of the lease, but had* the right to remove them or be reimbursed therefor at the expiration of the term. Appeal of Frank G. Shattuck Co., 2 B. T. A. 7.

With reference to the machinery, apparatus and equipment, there can be no question. It was purchased by the ’ partnership, with partnership funds, for use in the partnership business and, being removable property, it was not in any way affected by the lease or the nature of the tenancy.

The mere fact that the amounts expended for the property in question were charged off on the partnership books as ordinary business expenses, does not make them any the less capital expenditures. The true nature of a transaction can not be changed by a mere bookkeeping entry. The' same may be said with reference to the treatment of the property on the list filed in probate court.

In determining the partnership profits and the distributive shares of the taxpayers, the cost of the assets involved in these appeals, less depreciation to December 31, 1916, should be included in partnership invested capital for the purpose of computing excess-profits taxes for the year 1917, and reasonable allowance should be made for all years for the exhaustion, wear and tear of these properties.

In the appeal of Louis W. Cullum there is an additional question as to whether or not certain amounts claimed as losses and bad debts are properly deductible from income. With reference to these items the taxpayer has not adduced sufficient evidence to justify the Board in ruling that they are allowable deductions within the meaning of the law.


text:
    Appeal of OHIO VALLEY TIE CO.
    Docket No. 3433.
    Submitted June 25, 1925.
    Decided January 16, 1926.

      Camden R. MoAtee, Esq., for the taxpayer.

      L. G. Mitchell, Esq., for the Commissioner.
    Before Mabqtjette and Moeeis.
    This appeal is from.the determination of a deficiency in income and profits taxes for the eight-month period ended October 31, 1917, in the amount of $412.47; an overassessment of $1,097.75 for the fiscal period ended August 31, 1918, and no tax liability for the fiscal year 1919 having been found. The taxpayer claims that the Commissioner erred in disallowing as a deduction $1,200 interest paid in each of the said years.
    FINDINGS OF FACT.
    The taxpayer is' a Kentucky corporation with its principal office in Louisville. On October 1, 1910, the following written contract was executed by and between certain stockholders of the Ohio Valley Tie Co.:
    This Contract entered into tills 7tli day of October, 1910, between Augusta F. McCracken of first part, in ber own right and as executrix and sole legatee and advisee [sic] under the will of A. M. McCracken, deceased (hereinafter called Mrs. McCracken), and C. P. Bush of the second part, and Mr. W. Ford, X IT. Dean, W. P. Semple, H. M. McCracken, W. B. Fowlkes and S. B. Lynd, hereinafter called “ Associates ”, as parties of the third part, bears witness:
    Whereas, Mr. Bush on September 7, 1910 by written contract of that date with Mrs. McCracken purchased from her 225 shares of stock in the Ohio Valley Tie Company, upon the terms stated in said contract, including in such purchase the 200 shares of stock standing in the name of A. M. McCracken on the books of the corporation, and also his one-half interest in 50 shares of stock of the Ohio Valley Tie Company standing in the name of X H. Dean on the books of said corporation, and
    Whereas, such purchase was made by Mr. Bush for the benefit of himself and his “Associates” hereinbefore named, parties of the third part, and whereas Mr. Bush and “Associates” are now the owners of preferred stock of the Ohio Valley Tie Company of the par value of Fifty Thousand Dollars ($50,000.00) which Mrs. McCracken desires to acquire as an investment.
    Now this indenture witnesseth that Bush and his “Associates” have this day assigned and transferred to Mrs. McCracken all their interest in the preferred stock of the Ohio Valley Tie Company, being the entire issue of preferred stock of the par value of Fifty Thousand Dollars ($50,000.00), and in addition thereto, said Bush has executed and delivered to Mrs. McCracken his obligation for the principal sum of Twenty-Thousand Dollars ($20,000.) payable in four equal installments of Five Thousand Dollars ($5,000.00) each in one, two, three and four years respectively from October 1, 1910, and said Bush has also pledged to Mrs. McCracken as security for said obligation 250 shares 0¾ his common stock in the Ohio Valley Tie Company of the par value of Twenty-five Thousand Dollars ($25,000.00), and in consideration of the premises Mrs. McCracken has this day released said Bush and his “Associates” from all the obligations imposed upon them, or any of them, by said written contract of September 7, 1910, between Augusta F. McCracken and C. P. Bush.
    It is further agreed herein between said Bush and his “Associates” above named that in view of the fact that the purchase of Mrs. McCracken’s stock was in part for the benefit of the “Associates” said “Associates” hereby agree with said Bush each for himself and not one for the other, to assume and pay said Bush such portion of his obligation to Mrs. McCracken for Twenty-Thousand Dollars ($20,000.00) and interest as such'“Associate’s” share in the common stock of the Ohio Valley Tie Company now bears to the total outstanding issue of common stock of said corporation.

      The minutes of the meeting on October 7,1911, of the directors of the taxpayer corporation are as follows:
    Mr. Bush, the President, then called the attention of the Board of Directors to the issuance of a contract dated October 7, 1910 (which contract is on file in the record book of the corporation) calling for the payment to Mrs. Augusta IP. McCracken, for value received, by said Bush and the other Stockholders of the corporation, the sum of Twenty-Thousand Dollars ($20,000.00) no part of which has been paid, and, pursuant to the terms of the contract aforesaid, on motion of Mr. Bush duly seconded, it was unanimously resolved by the Board of Directors that this corporation do now declare and order paid, out of the earnings and profits of the corporation, a further special dividend of $1,200.00, being for interest at the rate of 6% per annum for one year on the $20,000. owing to Mrs. Augusta P. McCracken as per contract aforesaid.
    The minutes of the directors’ meeting on October 8, 1912, are as follows:
    The attention of the Board of Directors was then called to the existence of a contract dated October 7, 1910 (which contract is on file in the record book of the company) calling for the payment to Mrs. Augusta P. McCracken, for value received, by all the holders of Common Stock in the Company, the sum of Twenty Thousand ($20,000.00) Dollars, no part of which has been paid, and, pursuant to the terms of the contract aforesaid, it was unanimously resolved by the Board of Directors that the Secretary be and he is hereby authorized to pay to said Augusta F. McCracken, out of the earnings of the corporation, one year’s interest on said amount at the rate of six per cent (6%) per annum, or Twelve Hundred Dollars ($1,200.00) which amount instead of being handled on the books of the company as a special dividend as heretofore, shall upon the suggestion of Mr. James S. Escott (Auditor) be charged to the Company’s current interest account.
    The principal of the $20,000 referred to in the said contract was not paid, and the taxpayer during each of the taxable years in question took a deduction of $1,200 as interest paid on the $20,000, which deduction was disallowed by the Commissioner.
   DECISION.

The determination of the Commissioner is approved.