text:
    Pig & Whistle Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6811.
    Promulgated December 19, 1927.

      Lloyd 8. Ackerman, for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
   OPINION.

Van Fossan :

Petitioner contends that the unamortized or unextin-guished cost of the old lease became a loss upon the execution of the new lease and that a deduction of the total amount should be allowed in the taxable year. Respondent treated it as a cost of the new lease ta be exhausted or recovered by proration over the term thereof. We agree with the position of the respondent.

In the case of Charles N. Manning v. Commissioner, 7 B. T. A. 286, we held that the unextinguished cost of buildings removed in order to obtain a 99-year lease upon the land represented the cost to the lessor of such lease and should be exhausted over the term of the lease. In the opinion we said:

Taken by itself, the petitioners undoubtedly would be said to have sustained a loss in the demolition of their buildings, but when considered in connection with the entire transaction entered into on October 33, 1921, the Board is of the opinion that the removal of the buildings was fully compensated for in the rights acquired under the lease and that the cost of the buildings, less sustained depreciation, is properly allocable to the cost of securing the lease. In other words, there was in this instance what amounted to a substitution of assets; instead of an asset in the form of buildings, the petitioners now have another asset, viz., a lease, the giving up or voluntary destruction of the buildings being a necessary incident to the acquisition of the lease.

The reasoning is applicable here. While the unextinguished cost of the old lease might have been a loss had the lease been canceled before expiration if no new lease had been executed, viewing the entire transaction we believe there was such a continuity of rights and such an interrelation between the two leases as to justify the holding that the unextinguished cost of the first Avas part of the cost and consideration of the second.

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

Considered by Maiíquette and Phillips.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Strangman Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6964.
    Promulgated December 19, 1927.

      Walter 0. Foss, for the petitioner.

      F. 0. Graves, Esq., for the respondent.
   OPINION.

Van Fossan:

We are unable to determine from the record either the cost or the March 1,1913, value of the assets which were destroyed by fire in 1920. The facts submitted are meagre and the testimony of the treasurer of the petitioner corporation, the sole witness at the hearing, is confusing and conflicting.

The petitioner in arriving at the alleged loss of $9,160.38, stated that it used as a basis one-half of the 1920 replacement value of the plant as representing a March 1, 1913, value and deducted therefrom that portion of the insurance received applicable to the plant. This measure of value is purely an estimate or a crude approximation. It is not sufficient.

The burden of proof is on the petitioner to submit such evidence as will enable us to decide that the determination of the respondent is incorrect. This the petitioner has wholly failed to do.

Judgment will be entered for the respondent.

Considered by MaRquette and Phillips.


text:
    United States Refractories Corporation and Kistler Land & Improvement Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 5642, 12355.
    Promulgated December 19, 1927.

      B. P. Smith, Esq., for the petitioners.

      Thos. P. Dudley, Jr., Esq., and Granville S. Borden, Esq., for the respondent.
   OPINION.

Van Fossan:

We have to consider two fundamental questions, (1) the value of ganister rock property and certain contracts at the date of acquisition in 1911, and on March 1, 1913, and (2) the deductibility and amount of amortization of war facilities. The decision on these issues, coupled with the stipulation of the parties, disposes of all the issues that were presented.

For some years prior to 1911 Davis had been employed by Har-bison-Walker Corporation, a pioneer concern .in the ganister rock and silica brick manufacturing industry, and had devoted years to the study of that industry. He represented his company in various capacities and served in important positions. His familiarity with and knowledge of the industry, in all its phases, were recognized by the company and his opinion and advice were relied upon. For reasons not material here, Davis determined to sever his connection with Harbison-Walker and to organize a corporation to engage in the same industry. In furtherance of this plan in 1910 and 1911 he proceeded secretly to acquire options upon numerous small tracts of ganister rock, to negotiate contracts to insure a plant site, transportation facilities for raw materials and fuel requirements, and to obtain the necessary financial backing for his project. On September 12, 1911, all his preliminary plans having been perfected, Davis incorporated the petitioner and transferred to it the ganister lands and the agreements for contracts covering transportation and fuel, for which he received 120 shares of the capital stock.

Although it appears that the legal title to some of these lands was acquired in the name of the petitioner, after incorporation, direct from the original owners, without the intervention of Davis in the chain of title, the evidence is clear that the title to all the lands was acquired through the exercise of options owned by Davis and with funds supplied by Davis personally. Under such circumstances we think it clear that Davis transferred the beneficial ownership of all the property to petitioner and that the petitioner in effect received title to all the property from Davis in exchange for stock. (See Federal Plate Glass Co. v. Commissioner, 6 B. T. A. 351.)

Davis’ plans contemplated a plant with an ultimate capacity of 160,000 brick per day, but in 1912 the policy of the company was based on a plant of 30,000 brick per day, and it was not until the latter part of 1916 that petitioner reached a production of 160,000 bricks.

The ganister lands were acquired by Davis through an agent in small parcels from individual and independent owners, at a total cost not exceeding $30,000. The separate parcels, taken individually, were of comparatively little value, because of the limited quantity of rock recoverable from any one tract. All the parcels, however, being contiguous, when consolidated formed a property 11 miles in length, containing 8,000,000 tons of loose measure rock, recoverable without the necessity of drilling. As one property, these parcels were of much greater value than the sum of the values of the parcels as separate properties. Adams Express Co. v. Ohio State Auditor, 166 U. S. 219. (Cf. Appeal of Aguilar Land Association, 3 B. T. A. 705.) The rock on this property was of excellent quality, from which the best grade silica brick and by-products could be manufactured, and was readily accessible to petitioner’s proposed plant. The manufacture of steel by the open-hearth method was, in 1911, well advanced and was rapidly expanding, and the demand for brick made from ganister rock was increasing in proportion. The heat-resisting qualities of such brick made it highly desirable for use in steel furnaces, both of the old Bessemer type and the new open-hearth type. The development in 1911 of the by-product coke oven process created a further demand for ganister brick. It seems clear from the evidence before us that there was an adequate market available for petitioner’s product.

Davis placed a value of 10 cents per ton, or $800,000, upon the rock in place at the date of petitioner’s incorporation, basing his value largely on the estimated profits to be made in converting the rock into brick. The Commissioner’s value was $80,000. In the opinion of another witness, Mr. Hartman, this rock was worth from $500,-000 to $600,000. This figure was predicated on the assumption of a plant of large capacity. Mr. Hartman testified to three sales of ganister rock properties, in tracts much smaller than that acquired by the petitioner, made in Pennsylvania at or about 1911, where, in one instance, a tract containing approximately 150,000 tons of rock sold for $14,000, and in the -others, two tracts containing approximately 400,000 tons each sold for $60,000 and $40,000, respectively. These sales were not shown to be sufficiently representative to establish a conclusive measure of value.

Upon consideration of the entire record and giving due weight to all the evidence relative to the quality and quantity of the rock, the size of the property, the facility of recovery, the uses and demand for the product, the accessibility of the property, the existence of an available market, the assurance of a plant of 30,000 brick capacity, with a reasonable expectation of expansion, as well as the evidence of three sales of somewhat similar property, we find that the actual cash value of the ganister rock property and ganister rights paid in to the petitioner by Davis for stock was $300,000 at the time so paid in, 1911. Both petitioner and respondent agree that the value on March 1, 1913, was the same as at the date of acquisition. Accordingly, we find that the March 1, 1913, value of this property was $300,000. This amount should be used in the computation of petitioner’s invested capital and also in computing depletion allowances for the taxable years.

The evidence relative to the freight and coal contracts alleged to have been paid in by Davis at the date of incorporation, fails to establish any value therefor. There is some question whether Davis owned any such contracts, for it appears that all he had was the agreement of the railroad and coal companies to enter into such contracts with the petitioner, if and when incorporated. But even if it be conceded that Davis did own such contracts there is no basis in this record upon which to find any value therefor. It appears that similar contracts upon like terms were made by the coal company with other corporations, competitors of the petitioner, and so far as the record discloses any one desiring such a contract might obtain it upon application to the coal company. The same observation applies to the railroad contract. Nothing was paid for it and it was not shown to be exclusive. Although such contracts may have afforded some security to the petitioner in solving its transportation and fuel problems, and contributed to the successful organization of the company, there is nothing in the record to indicate that they had an independent value. Neither Davis nor the petitioner paid a bonus for these contracts and it nowhere appears that they could be sold for any amount. We hold, therefore, that the freight and coal contracts had no cash value either at the date of acquisition or on March 1, 1913, and they were properly excluded from invested capital. It follows that no deduction is allowable in the taxable years for the exhaustion of such contracts and that no deduction can be allowed in the year 1918 for the alleged loss of the freight contract.

We come now to the last issue — -amortization of war facilities. The petitioner claims a deduction from gross income for the amortization “ of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war,” under the provisions of section 234(a)(8), Revenue Act of 1918. The claim comprises certain dwelling houses constructed by the subsidiary corporation, as well as certain items of plant equipment, as set forth in the findings of fact. The respondent refused to allow a deduction for amortization and contends that the petitioner is not entitled to such an allowance, for the reason that no “ claim therefor was made at the time of filing return for the taxable years 1918, 1919, 1920, or 1921” as provided by section 234(a)(8), Revenue Act of 1921, and no claim therefor was made before June 15, 1924, as provided by section 1209, Revenue Act of 1926.

It is not disputed that petitioner filed with its 1918 and 1919 returns claims for amortization of war facilities, but it appears that the claims so filed do not agree in amount and in certain items with the claim made in this proceeding. It further appears that petitioner by letter of February 28, 1921, tentatively withdrew its claim for amortization of war facilities filed with the 1918 return, “ to the end that consideration of the revision of the income tax may be had under sections 327 and 328, otherwise to be reinstated.” It does not appear that the claim filed with the 1919 return was ever withdrawn for any purpose, but neither of the original claims embraced the houses constructed by the subsidiary corporation. Upon these facts the respondent contends that no claim for amortization was made within the time prescribed by the revenue laws.

The Revenue Act of 1918, section 234(a) (8), provided that in the case of facilities—

constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, * * * there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities * * * as has been borne by the taxpayer.

No special method or limitation is prescribed by the 1918 Act for the making or allowance of a claim for such deduction. In section 234(a) (8) of the 1921 Act, however, Congress did incorporate a specific limitation upon amortization claims by providing that the deduction—

shall he allowed, for any taxable year ending before March 3, 1924 (if claim therefor was made at the time of filing return for the taxable year 1918, 1919, 1920, or 1921).

Since it is conceded petitioner made a claim for amortization with its 1918 and 1919 returns, the decision on this point turns on the effect of petitioner’s letter of February 28, 1921.

The letter in question is couched in conditional or contingent terms. It was at most a tentative withdrawal. The fact that the claim was subsequently insisted upon and considered by the Bureau indicates that it was so understood by both parties. It was subsequently referred to in various communications and the deficiency letters on which the proceeding is based ruled adversely on its merits.

The tentative withdrawal was much in the nature of an offer in compromise and failing to accomplish the settlement of the tax controversy between the parties, it should not be held binding. We are of the opinion that petitioner’s claim for amortization is properly before us for consideration.

Nor is it material that the items of the claim presented before us are not identical with the items contained in taxpayers’ statement of claim attached to its returns. Respondent’s contention would forbid any amendment of such a claim, either by striking out or adding to the items originally presented. In our opinion such a strict construction would be violative of the purposes of the law. The amortization provision is a relief measure, and should be liberally construed. A reading of the Act convinces us that the clause, “ if a claim therefor was made ” refers to and modifies the phrase, “ reasonable deduction for amortization.” The making of the claim at the time of filing the return puts the Government on notice of the existence of the claim. Its duty then is to determine what constitutes a reasonable deduction. It is conceivable that a claim for a reasonable deduction for the amortization of war facilities set up as a lump sum with no itemization might be held to satisfy the provision that “ a claim therefor be made.” There is nothing in the Act specifically requiring itemization or forbidding amendment at any time before final settlement. We are satisfied that petitioner, having made claim for a reasonable deduction for amortization at the time of filing its return, may properly be allowed to amend its claim at the time of filing a petition with the Board, and may include items not listed in its original claim.

The petitioner filed a consolidated return for the taxable years, for itself and subsidiary, the Kistler Land & Improvement Co., and its tax liability has been determined upon the basis of consolidated net income. No question is raised as to the affiliation of the two corporations. It follows that for the purpose of the taxing statutes the two corporations are to be treated as one and their separate, independent corporate identities are merged into the new taxable entity thus created. Appeal of American La Dentelle, Inc., 1 B. T. A. 515. All matters affecting the tax liability of either or both members of the group are to be considered in determining the tax liability of the new taxable entity. The amortization deduction, as well as all other deductions to which either or both corporations are entitled, is allowable to the new entity. Appeal of G. M. Standifer Construction Corporation, 4 B. T. A. 525. It follows further that a claim for amortization filed by the new entity (or the parent corporation) in accord with the provisions of the Act is a sufficient compliance with the requirement that a claim be filed, to entitle the consolidated group to the amortization deduction allowable to both corporations. We proceed, therefore, to consider the amortization of the houses erected by the subsidiary company.

The houses constructed by the subsidiary corporation, with funds supplied by the petitioner, are facilities constructed or erected for the production of articles contributing to the prosecution of the war, within the meaning of section 234(a) (8) of the Revenue Acts of 1918 and 1921. The petitioner had to supply living quarters for its employees in order to obtain the labor necessarj? to operate its plant, and the subsidiary corporation was organized merely as a convenient method of providing the necessary housing facilities. See Appeal of G. M. Standifer Construction Corporation, supra.

The number of houses, and the cost thereof, constructed by the subsidiary company on or after April 6, 1911, are set forth in the findings of fact. A total of 175 housing units were available and occupied in the year 1918 and the greatest average number of units occupied at any time in the normal joostwar years was 90. The value in use of such houses was, therefore, a fraction over 51 per cent and the decline in useful value was approximately 49 per cent, which we find is a reasonable allowance for the amortization of the cost of the houses.

The expenditures under the contracts on account of these houses were $92,210 and the amortization deduction should be computed on this basis. The expenditures in excess of this figure were not explained and are excluded.

We have set forth in the findings of fact the facilities constructed, erected, installed, or acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the war, together with the cost thereof. It appears that certain expenditures on account of some of the facilities were made subsequent to November 11, 1918, and in the year 1919, but the evidence is clear that all the equipment was constructed pursuant to a plan of expansion determined upon in 1917 after April 6, and that the expenditures made' in 1919 were necessary to the completion of construction theretofore begun, which would have been totally lost unless completed. In this circumstance we believe the expenditures subsequent to December 31,1918, should be included in the computation of amortization.

Considering the specific items, it appears that the crusher, erected in 1917 at a cost of $7,633.91, was used but little during the war period and at the close of the war was placed upon a siding and scrapped, and that the electric outfit, erected in 1918 at a cost of $28,477.38, was never used by the petitioner and was sold in 1925 for $2,500. Amortization on these two items should be allowed for the full amount of the cost after deducting depreciation incurred, and, in the case of the electric outfit, the salvage value realized upon the resale in 1925. It was not established that the product of the dust mill was an article contributing to the prosecution of the war and no amortization on account of its cost is allowed. The storage sheds have been used to capacity in the postwar years, as well as during the war period, and the petitioner abandoned its claim for amortization of their cost. The remaining facilities of plant equipment have been used to some extent during the postwar years, but the available production has not been sufficient to permit of their use to capacity, nor is it possible to determine the exact percentage of use of each item. As to these latter facilities, therefore, their value in irse to the petitioner in the postwar years may properly be measured by comparing the maximum war-time production of the plant with the maximum production in any of the postwar years. The production of the plant in 1917 was 40,590,475 brick, while the maximum production reached in any of the normal postwar years (1923) was 25,754,258 brick. It thus appears that the facilities in question had a useful value of 63.4 per cent during the postwar period and that the decline in useful value is 36.6 per cent, which we find is reasonable and should be allowed.

It did not appear in the record of the case that petitioner’s wartime production continued beyond December 31, 1918, and that date is accordingly fixed as the termination of the amortization period. The deduction for amortization will be confined to the 1918 income. Appeal of John, Polachek, 3 B. T. A. 1051.

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

Considered by Marquette and Phillips.


author: Gkeen :

text:
    Atlantic Coast Distributors, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7088.
    Promulgated December 20, 1927.

      J. B. Grice, O. P. A., for the petitioner.

      J. Artlvwr Ada/ms, Esq., for the respondent.
   OPINION.

Gkeen :

We have for consideration here the single question whether or not the petitioner is entitled to classification as a personal service corporation under section 200 of the Revenue Act of 1918.

The Act specifies three essential elements that must concur to constitute a corporation one of personal service — (1) the principal owners or stockholders shall be regularly engaged in the active conduct of the affairs of the corporation; (2) its income must be ascribed primarily to their activities; and (3) capital (invested or borrowed) must not be a material income-producing factor. The absence of any of these elements is fatal to a claim for personal service.

In the instant case, W. H. Mixon, who owned one-half of the stock, devoted considerable of his time to the management of two other concerns, from which he drew substantial salaries, while he drew no salary from the petitioner. The company, in the conduct of its business, employed other brokers to assist in the marketing of its goods. The petitioner, in addition to carrying on its brokerage business, also at certain seasons of the year traded as principal in seed potatoes and apples. This trading produced over one-fifth of its income, and in order to carry on this feature it was compelled to borrow money in substantial amounts. In addition to the profit received from such trading, particularly in the case of the seed potatoes, the petitioner benefited indirectly by both increasing and holding its business with the truck farmers, and also by reason of its all-year contract with wholesale produce dealers. These indirect benefits are attributable to the use of capital.

Accordingly we are of the opinion that the petitioner does not come within the terms of the above-mentioned section and is not entitled to be classified as a personal service corporation.

Judgment toill he entered, for the respondent.

Considered by Steeniiagen, Lansdon, and Aeundell.


author: Lansdon :

text:
    Abraham W. Ast, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7168.
    Promulgated December 20, 1927.

      Joseph B. Miller, Esq., for the petitioner.

      A. II. Fast, Esq., for the respondent.
   OPINION.

Lansdon :

Petitioner claims that there should be deducted from his gross income, as ordinary and necessary business expenses, 60 to 70 per cent of the items of automobile expenses, hereinbefore set forth. The respondent has allowed a deduction of approximately 45 per cent. While there seems to be no doubt that the automobile was used to some unknown extent in connection with the business, it was also used to a large extent for personal purposes. Expense incurred by petitioner in going between his residence and place of business is not an ordinary and necessary business expense. Frank H. Sullivan, 1 B. T. A. 93; Charles H. Sachs, 6 B. T. A. 68. The evidence does not establish that the portion of the expense to be allocated to the business is more than the amounts allowed as deductions by the respondent.

It does not appear that petitioner’s compensation was fixed by the firm with a view of requiring him to maintain this automobile for the use of the business. Franklin M. Magill, 4 B. T. A. 272; Arthur B. Chivers, 4 B. T. A. 1083; Maurice H. Winger, 6 B. T. A. 945.

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

Considered by SteRNHagen, Geeen, and Aeundell.


author: Gbeen :

text:
    Farmers’ Co-operative Milk Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11452.
    Promulgated December 20, 1927.

      Daniel F. Hickey, Esq., for the petitioner.

      J. S. Easby-Smith, Esq., for the respondent.
   OPINION.

Gbeen :

The petitioner claims exemption from taxation under section 231 (11) of the Revenue Acts of 1918 and 1921, and should it fail in this, it contends that the 6 per cent dividend paid its stockholders in accordance with section 1, article XIY of its by-laws is an allowable deduction from gross income. In any event, it contends that the respondent is barred by the statute of limitations from collecting the deficiency of $917.21 proposed for the fiscal year ended February 29, 1920.

Section 231 (11) of the Revenue Acts of 1918 and 1921 provides that the following organizations shall be exempt from taxation:

Farmers’, fruit growers’, or like associations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them.

These sections grant exemption from taxation. They must be strictly construed and a taxpayer claiming exemption under them must prove clearly that it comes within their provisions. Appeal of Waynesboro Manufacturers Association, 1 B. T. A. 911.

We do not think the petitioner has succeeded in proving that it comes within the exemption clause. Article VIII of the petitioner’s by-laws provides that its capital stock shall consist of $100,000, represented by 20,000 shares of the par value of $5 each; article IX provides that in order to become a stockholder a person must own at least one share; that no person shall own more than 1,000 shares; and article XIV provides that “After April 1st, 1916, there shall be set aside, monthly sufficient funds to pay the 6 per cent, dividends on the capital stock, to be declared at each annual meeting; the same to have preference over the monthly payments to patrons.” On December 31, 1921, there was a total of 262 stockholders of which 42 were of the nonproducing class. Under the terms of the by-laws it was possible for a nonproducing stockholder to own 1,000 shares of stock of the par value of $5,000, on which he would have preference of receiving $300 ,in dividends over the monthly payments to patrons while at the same time a producing stockholder who only owned one share of stock would be entitled to dividends of only 30 cents. The record does not show the amount of stock held by the 42 nonproducers, but it would have been possible for them to own over 98 per cent. Were that true we do not think the test in the statute is met which requires that the proceeds of sales (less the necessary selling expenses) be turned back “ on the hads of the quantity of prodxice furnished.” Furthermore, the statute grants exemption only to those associations that are organized and operated for the purpose of marketing the products of “members.” The petitioner marketed the products of “ nonmembers,” but to what extent we were not advised. In fact the evidence tells us very little of how the business of this petitioner was conducted. In the absence of proper evidence we must approve the respondent’s determination on this point.

Whether the 6 per cent fixed dividends on capital stock may be deducted from gross income in determining net income has already been decided adversely to the petitioner’s contentions. See Appeals of Sacred Heart Cooperative Mercantile Co., 2 B. T. A. 24; Farmers' Cooperative Association, 5 B. T. A. 61; and Trego County Cooperative Association, 6 B. T. A. 1275.

The petitioner contends that the respondent is barred by the statute of limitations from collecting the deficiency of $917.21 for the fiscal year ended February 29, 1920, which he, for reasons not shown by the record, assessed on March 14, 1927. It bases its contention on the ground that the consent executed by both parties on March 18, 1925, relates to the assessment only; that it was not valid beyond December 31, 1925; that the assessment being made after December 31, 1925, was invalid; and that the respondent having brought no suit or proceeding for the collection of the taxes within five years from May 12, 1920, the date it filed its return, the collection is now barred.

Section 278 of the Revenue Act of 1924, which was in effect at the time the consent in question was agreed upon, provides in part as follows:

Seo. 278. (c) Where both the Commissioner and the taxpayer have consented in writing to the assessment of the tax after the time prescribed in section 277 for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon.
Sec. 278. (d) Where the assessment of the tax is made within the period prescribed in section 277 or in this section, such tax may be collected by distraint or by a proceeding in court, begun within six years after the assessment of the tax. * * *

Counsel for the petitioner argues, however, that the period agreed upon in the consent was December 31, 1925, and that the excepting clause in the consent providing that “ if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and * * * an appeal is filed with said Board, then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board,” was ineffective. He argues further as follows:

It Is to be observed that an attempt to extend a date is made in this waiver, whereas such an extension is an impossibility. December 31, 1925, will remain December 31, 1925.
Section 27S (c) of the Revenue Act of 1924, which controlled this waiver question when the waiver was filed, provides: “(c) Where both the Commissioner and the Taxpayer have consented in writing to the assessment of the tax after the time prescribed in Section 277 for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon.” Article 1271 (6) of Regulations 65, which is the Commissioner’s own interpretation of the foregoing statute, also contains the words, “ expiration of the period agreed upon.” Now, while the Commissioner, in preparing this waiver, doubtless intended to provide for the extension beyond December 31, 1925, of the period within which the tax might be assessed in the event of an appeal to this Board, he failed to do so. A date and a period of time are not the same.

We see no merit in such an argument. The period here agreed upon for assessment of tax ended December 31, 1925, except that if the respondent mailed the petitioner a deficiency letter before December 31,1925, and the petitioner appealed to the Board, the period ending December 31, 1925, was to be extended by the number of days between the date of mailing of the letter and the date of final decision by the Board. We express no opinion as to the validity of the assessment made by the respondent on March 14, 1927, but in any event it is our opinion that the period within which a valid assessment may be made will not expire until twenty-nine days after our decision has become final. It follows that in accordance with section 278 (d) of the Revenue Act of 1926, the collection of such deficiency is not barred.

Judgment will be entered for the respondent.

Considered by Sternhagen, Lansdon, and Aeundell.


author: Siefkin:

text:
    Wilmington Steamboat Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9637.
    Promulgated December 20, 1927.

      Andrew S. Wilson, G. P. A., for the petitioner.

      M. N. Fisher, Esg., for the respondent.
   OPINION.

Siefkin:

The evidence in this case does not satisfy us that a loss has been sustained. Petitioner purchased the stocks of five corporations for a consideration consisting of notes of a face value of $111,655.63 and stock of a par value of $150,000. At first petitioner allocated $72,000 of the purchase price on its books, such sum being the par value of the stocks purchased, to the various stocks Later, on advice of the Interstate Commerce Commission that an allocation of $189,655.63 additional was necessary, that amount was allocated to the various capital stocks in proportion to their par value. Upon that basis the sum of $90,852.65 was entered on the books as the cost of the stock of the Merchants Transportation Co., of which $25,000 was to cover the par value of the stock and $65,852.65 for an element of intangible value. The only asset of the Merchants Transportation Co. was a steamer which, according to a balance sheet at April 30, 1916, cost not more than $26,314.52. The corporation was organized in November, 1915, to transport workmen to a munitions plant. There is a strong inference from these facts, and from the absence of any showing as to earnings of that company, that any intangible values attaching to the purchase of the stock of the five corporations must have been attributable, not to the Merchants Transportation Co., but to the stock of some other company or companies included in the purchase. It is improper for us to surmise and unnecessary for us to decide where such value should be allocated if we find, as .we do, that there is no justification, except an arbitrary book entry, for the allocation of any part to the Merchants Transportation Co.

Even if the petitioner were able to ascertain the cost of the stock sold, there would be no deductible loss on the liquidation since the petitioner and the Merchants Transportation Co. were affiliated until the latter was dissolved. The Merchants Transportation Co. sold its assets and the gain or loss on such sale was reflected in the consolidated net income. After the sale, affiliation continued although the assets of the Merchants Transportation Co. consisted of cash. Under such circumstances, no deductible loss results. See Appeal of U. S. Trust Company. 1 B. T. A. 901, 904. Cf. H. S. Crocker Co., 5 B. T. A. 537.

Judgment will be entered for the respondent.

Considered by Moiaais, Murdook, and Littleton.


author: Geeen :

text:
    Appeal of George W. Fuller.
    Docket No. 3014.
    Promulgated December 20, 1927.

      Philip Nichols, Esq., for the petitioner.

      Briggs G. Simpich, Esq., for the Commissioner.
   OPINION.

Geeen :

More than a century ago the United States Supreme Court, speaking through Chief Justice Marshall, in the leading case of McCulloch v. Maryland, 4 Wheat. 316, recognized the doctrine impliedly established by the Constitution that the government of a State could not interfere by taxation or otherwise with the means, agencies, or instrumentalities by which the Federal Government-exercised its functions. The converse of that proposition was later established by the case of Collector v. Day, 11 Wall. 113, in which it was decided that the Federal Government could not tax the means, agencies or instrumentalities by which a State exercised its governmental functions.

As a result of such decisions the ñrst income-tax act passed after the Sixteenth Amendment provided “ That in computing net income under this section there shall be excluded * * * the compensation of all officers and employees of a State or any political subdivision thereof.” Section II B, Act of October 3, 1913. To the same effect was the Act of September 8,1916, unamended in this particular by the Act of October 3,1917. This provision, however, was omitted from the Revenue Act of 1918, its omission being explained in Report 617, Senate Finance Committee, 65th Congress, Third Session, at page 6, as follows:

Tlie committee amended Section 213 (a) so as to require that any gains, profits, and income derived from salaries, wages, or compensation of personal service, of whatever kind and in whatever form paid, and so on, be subject to income tax, leaving the constitutional question as to the authority of Congress to tax certain salaries to be settled by the courts in any case in which the question may be raised.

Shortly after the passage of the 1918 Act the Secretary of the Treasury issued Treasury Decision 2843, which provided in part that:

In accordance with an opinion of the Attorney General, dated May 6, 1919, and based on the well-settled rule that governmental agencies of the States are not subject to taxation by the Federal Government, it is held that salaries of State officials and salaries and wages of employees of a State are not subject to the income tax imposed by the said Revenue Act of 1918.

' As a result of Treasury Decision 2843 just mentioned, article 85 of Regulations 45 and article 88 of Regulations 62 and 65 were promulgated, exempting compensation received by state officers or employees, and upon the passage of the Revenue Act of 1926, Congress provided:

Sec. 1211. Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded.

The questions, therefore, which are presented in this proceeding are, first, was the petitioner either an officer or employee of any State or political subdivision thereof during the taxable year 1919; and, second, if not, is the respondent, by attempting to tax the compensation received by the petitioner from the several municipalities, in effect taxing the means, agencies, or instrumentalities by which the State exercises its governmental functions?

The latest expression by the United States Supreme Court on both of these questions is Metcalf & Eddy v. Mitchell, 269 U. S. 514; 46 Sup. Ct. 172. In that case Metcalf and Eddy were in 1917 consulting engineers who, either individually or as copartners, were professionally employed to advise States or subdivisions of States with reference to proposed water-supply and sewage-disposal systems. In each case the service was rendered in connection with a particular project for water supply or sewage disposal, and the compensation was paid in some instances on an annual basis, in others on a monthly or daily basis, and in still others on the basis of a gross sum for the whole service. The fees received by them for these services were paid over to the partnership and became a part of its gross income, upon which an income tax was collected. The District Court held that such compensation was not exempt from taxation, either by the provisions of the statute or under the Constitution. The Supreme Court, in affirming the decision of the District Court, said in part:

We think it clear that neither of the plaintiffs in error occupied any official position in any of the undertakings to which their writ of error in No. 183 relates. They took no oath of office; they were free to accept any other concurrent employment; none of their engagements was for work of a permanent or continuous character; some were of brief duration, and some from year to year, others for the duration of the particular work undertaken. Their duties were prescribed by their contracts and it does not appear to what extent, if at all, they were defined or prescribed by statute. We therefore conclude that plaintiffs in error have failed to sustain the burden cast upon them of establishing that they were officers of a state or a subdivision of a state * * *.
An office is a public station conferred by the appointment of government. The term.embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its term, its duties and its compensation. United States v. Hartwell, 6 Wall. 385, 18 L Ed. 830; Hall v. Wisconsin, 103 U. S. 5, 26 L. Ed. 302. The term “ officer ” is one inseparably connected with an office; but there was no office of sewage or water supply expert or sanitary engineer, to which either of the plaintiffs was appointed. The contracts with them, although entered into by authority of law and prescribing their duties, could not operate to create an office or give to plaintiffs the status of officers. [Citations.] There were lacking in each instance the essential elements of a public station, permanent in character, created by law, whose incidents and duties were prescribed by law [Citations].
Nor do the facts stated in the bill of exceptions establish that the plaintiffs were “ employees ” within the meaning of the statute. So far as appears, they were in the position of independent contractors. The record does not reveal to what extent, if at all, their services were subject to the direction or control of the public boards or officers engaging them. In each instance the performance of their contract involved the use of judgment and discretion on their part and they were required to use their best professional skill to bring about the desired result. This permitted to them liberty of action which excludes the idea that control or right of control by the employer which characterizes the relation of employer and employee and differentiates the employee or servant from the independent contractor. [Citations].
We pass to the more difficult question whether Congress had the constitutional power to impose the tax in question, and this must be answered by ascertaining whether its effect is such as to bring it within the purview of those decisions holding that the very nature of our constitutional system of dual sovereign governments is such as impliedly to prohibit the federal government from taxing the instrumentalities of a state government, and in a similar manner to limit the power of the states to tax the instrumentalities of the federal government. * * *
Just what instrumentalities of either a state or the federal government are exempt from taxation by the other cannot be stated in terms of universal application. But this court has repeatedly held that those agencies through which either government immediately and directly exercises its sovereign powers, are immune from the taxing power of the other. * * *
When, however, the question is approached from the other end of the scale, it is apparent that not every person who uses his property or derives a profit, in his dealings with the government, may clothe himself with immunity from taxation on the theory that either he or his property is an instrumentality of government within the meaning of the rule. [Citations.]
* * * * * * *
But here the tax is imposed on the income of one who is neither an officer nor an employee of government and whose only relation to it is that of contract, under which there is an obligation to furnish service, for practical purposes not unlike a contract to sell and deliver a commodity. In such a situation it cannot be said that the tax is imposed upon an agency of government in any technical sense, and the tax itself cannot be deemed to be an interference with government, or an impairment of the efficiency of its agencies in any substantial way. [Citations.] * * * We do not suggest that there may not be interference with such a contract relationship by means other than taxation which are prohibited. * * *
But we do decide that one who is not an officer or employee of a State, does not establish exemption from federal income tax merely by showing that his income was received as compensation for service rendered under a contract with the state; and when we take the next step necessary to a complete disposition of the question, and inquire into the effect of the particular tax, on the functioning of the state government, we do not find that it impairs in any substantial manner the ability of plaintiffs in error to discharge their obligations to the state or the ability of a state or its subdivisions to procure the services of private individuals to aid them in their undertakings. * * * We therefore conclude that the tax * * * was properly assessed.

What the United States Supreme Court has said in the Metcalf case is in our opinion applicable here. We do not believe that the petitioner was either an officer or an employee of any State or political subdivision thereof. He took no oath of office in connection with any of the contracts with the several municipalities. He was free to accept any other employment. There was no office created by statute to which the petitioner was appointed. His status was prescribed by contract rather than by statute and in performing such contracts the record does not show that he was subject to the direction or control of the various public boards which engaged him. On the contrary he was left to use his own judgment and discretion and was to exercise his best professional skill to bring about the desired result.

Since in our opinion the petitioner was neither an officer nor an employee of any State or political subdivision and whose only relation thereto was that of contract “ it cannot be said that the tax is imposed upon an agency of government in any technical sense, and the tax itself cannot be deemed to be an interference with government, or an impairment of the efficiency of its agencies in any substantial way.” Metcalf & Eddy v. Mitchell, supra. The evidence does not show that the imposition of the tax would impair in any substantial manner the ability of the petitioner to discharge his obligations to the various municipalities or the ability of such municipalities to procure the services of private individuals to aid them in their undertakings. Cf. Appeal of Robert G. Gordon, 5 B. T. A. 1047; Appeal of Emma B. Brunner, 5 B. T. A. 1135; Union Pawing Co. v. Commissioner, 6 B. T. A. 527; Fred H. Tibbetts v. Commissioner, 6 B. T. A. 827; and A. C. Kreipke v. Commissioner, 7 B. T. A. 777.

Judgment will be entered for the Commissioner.

Considered by Sternhagen, Lansdon, and Arundell.


author: Siefkin :

text:
    Imperial Furniture Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 16929.
    Promulgated December 20, 1927.

      Julius H. Amberg, Esg., and Frank E. Seidman, O. P. A., for the petitioner.

      John F. Greaney, Esg., for the respondent.
   OPINION.

Siefkin :

We had occasion to consider what constituted ascertainment of worthlessness in John E. Saddler, 2 B. T. A. 1305, from which we quote:

The ascertainment of tlie worthlessness of a debt, either in whole or in part, is the exorcise of sound business judgment based upon as complete information as is practicably obtainable.

Was petitioner’s judgment, that the portion of the debt in controversy was Avorthlcss, formed on the basis of such information as was practicably obtainable? The evidence shows that as soon as the amount of the debt was revealed by the preliminary audit of its own books, petitioner caused an audit to be made of the debtor’s books; that petitioner’s princiiial officer immediately made a personal investigation of the various assets of the debtor; that he took up the matter of Davies’ overdraft with Davies, who disclosed his assets and liabilities; that the account owed by the defaulting phonograph companies was considered practically worthless by Davies and Foote, both of whom were familiar with that class of trade and were supported by the commercial reports (it should be noted that this obligation was being investigated not as the debt in question but as an asset of the debtor); that the plant assets of the debtor were worth much less than book value in the opinion of Foote, who was well qualified to judge such values; and that the debtor’s inventory was worth not more than 50 per cent of cost, due to a falling market and the condition of the goods on hand. Foote’s judgment as to values as well as to the probable percentage of recovery is amply supported by the testimony of Davies and by subsequent developments. Accordingly, we can only conclude the debt was ascertained to be worthless within the year.

There remains the question whether the charge off was made within the year in compliance with the statute. Prior to the close of the year the bookkeeper was instructed to charge off at the end of the year 50 per cent of the debt as worthless. He did so when the closing-entries for the year were made in February or March of the succeeding year. With respect to the requirement that the debt be charged off within the year, in Mason Machine Works Co., 3 B. T. A. 745, we said:

This language must be interpreted in the light of the ordinary course of business practice. It is not the physical act done within the year to which Congress has referred, but to the setting up of evidence of the ascertainment of worthlessness substantially as of the date of such ascertainment and in confirmation thereof.

And again, in George H. Fraser, 6 B. T. A. 997:

The purpose of the statute appears to be to require that some record be made of the ascertainment of worthlessness. An interpretation of the statute which would deny any deduction except when a charge-off was made upon books of account within the limits of the calendar year, especially when it is considered that closing’ entries are not usually made until after the close of the year, would work a hardship which we can not believe was intended or is required and would attach to acts which are merely clerical an importance as great is to be given (o the substance of the situation. The statute must be gtvmi a reasonable interpretation, if possible. Clearly it was the intent that a deduction should bo allowed for worthless debts in the j'ear in which worthlessness was ascertained and that the charging off of the debt might take other forms than entries on the books of the taxpayer.

Wo. think the quoted excerpts are controlling in the case at bar. Within the taxable year worthlessness was ascertained and the bookkeeper was instructed to charge the debt oil'. The deficiency will be recomputed allowing the bad debt deduction as claimed in the amount of $49,934.29.

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

Considered by MoRRis and Murdock.


text:
    Brown Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12703.
    Promulgated December 20, 1927.

      Frank E. Seidman, G. P. A., and Jacob S. Seidman, Esq., for the petitioner.

      Orris Bennett, Esq., for the respondent.
   OPINION.

Siefkin :

Four errors were assigned by petitioner — that respondent erred (a) in refusing to allow losses claimed by petitioner on account of two purchases of lumber made in 1920, which, at the close of the year 1920, had a fair market value less than cost, (b) in not computing the tax under the special assessment provisions, (c) in not including certain 1917 expenditures, less depreciation to January 1, 1920, for machinery in invested capital for 1920, and (d) in failing to allo w depreciation on such machinery. Under stipulation of the parties the adjustments on the last two items are agreed to and there remain for our consideration only the first two items.

On the first issue only one question remains to be determined— whether title to the lumber covered by the contracts had passed to petitioner on December 31, 1920. The other factors involved, as the cost of the lumber and its fair market value on December 31, 1920, were stipulated.

The contracts were entered into in the State of Michigan and must be construed under the laws of that State. The Uniform Sales Act is in force in Michigan. Sections 11849 and 11850, Comp. Laws Mich., 1915, so far as pertinent, are as follows:

11849. Sec. 18. Property in specific goods passes when parties so intend.
(1) Where there is a contract to sell specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties, usages of trade and the circumstances of the case.
11850. Sec. 19. Rules for ascertaining intention. Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer:
Rule 1. Where there is an unconditional contract to sell specific goods, in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment, or the time of delivery, or both, be postponed.
Rule 4 (1). Where there is a contract to sell unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer, or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may be expressed or implied, and may be given either before or after the appropriation is made.
Rule 5. If the contract to sell requires the seller to deliver the goods to the buyer, or at a particular place, or to pay the freight or cost of transportation to the buyer, or to a particular place, the property does not pass until the goods have been delivered to the buyer or reached the place agreed upon.

The respondent urges that both of the contracts in question, being f. o. b. contracts, fall within the purview of Rule 5 above quoted. Williston on Sales, vol. 1, p. 602, in regard to the question as to when property passes under f. o. b. contracts, says:

As it is a necessary implication in F. O. B. contracts that the buyer is to be at all expense in regard to the goods after the time when they are delivered free on board, the presumption follows that the property passes to the buyer at that time, and not before, though the goods are brought to the point of shipment and are ready for loading.

This statement is supported by decisions of the Supreme Court of Michigan both before and after the enactment of the provisions of the Uniform Sales Act. In Detroit Southern R. R. Co. v. Malcolm- son, 107 N. W. 915, where the contract was to furnish all coal needed by the second party until a specified time at certain prices, f. o. b. Michigan Central R. R., and where it was argued that f. o. b. was only a factor in the selling price, the court said:

* * * “ Free on board ” has acquired a settled judicial meaning. Vogt v. Schienebeck (Wis.) 100 N. W. 820, 67 L. R. A. 756.

In the Vogt case cited, the contract was as follows:

Received of Paul Vogt of Milwaukee, Wis., Five ($5) dollars on account of sale to him by me, made this 15th day of November, 1902, of 100,000 feet more or less of pine one inch lumber at Bight Dollars per 1,000 feet common or better now at Stadler’s Mill, f. o. b. to be delivered upon demand within two months from above date. Inspection fees to be paid by both of us.

In discussing the authorities applicable to this contract, the court said they generally hold—

that a sale F. O. B. cars means that the subject of the sale is to be placed on the cars for shipment without any expense or act on the part of the buyer and that as soon as so placed, the title is to pass absolutely to the buyer * * *.

In a later case, Dow Chemical Co. v. Detroit Chemical Works, 208 Mich. 157; 175 N. W. 269, the Michigan Supreme Court restates the rule thus approved by it in Detroit Southern R. R. Co. v. Malcolmson, as follows:

The general rule is that title passes when the vendor has fully performed in the appropriation and delivery of the goods to the vendee, and delivery to a public carrier for transportation constitutes delivery to the vendee. There may, of course, be stipulations in the contract or circumstances attending its performance which indicate a contrary intention. Wagar v. Railroad Co., 79 Mich. 648, 44 N. W. 1113 (wherein a bill of sale was given at the time of contracting). This rule is, in' effect, incorporated in the sections of the Uniform Sales Act * * *.

Decisions such as the foregoing do not purport to state a fixed rule of law, but merely discuss a presumption designed to aid in ascertaining by inference the intent of the parties as to when title should pass.

It remains for us to examine the terms of the contract, the conduct of the parties, usages of trade and the circumstances attending the several contracts to determine whether, as urged by petitioner, the intentions of the parties thereto were shown to be that title should pass at some time other than when the subject matter was loaded on the cars. For this purpose the contracts in question will be separately considered.

With respect to the Chesbrough contract the petitioner, apparently, would have us distinguish between the lumber in pile at the time the contract was entered into and that to be later cut. As to that part in pile petitioner calls attention to the use of the words buys ” and “ sells ” which it is contended indicate a sale rather than an agreement to sell. In support of its position, petitioner cites Richardson Lumber Co. v. Hoey, 219 Mich. 643, wherein the contract was to “sell you the cedar ties we now have on the Boyce property * * * at 42 cents on the ground as they are.” However, the words used there leave little doubt that the sale was made outright without any further act required of the seller, the only thing remaining to be done was to check the estimate given in the contract by an actual count of the ties. The ties in that case and the lumber in pile in the instant case may be said to have been in a deliverable state. However, no delivery other than the seller’s allowing the buyer to take the goods was contemplated in the cited case, while in the case at bar, the delivery required of the seller to complete the terms of the contract was the actual loading on the cars. See Williston on Sales vol. 1, p. 591. This distinction will be again referred to below in connection with the consideration of the contract as a whole.

Petitioner’s contention that the contract should be divided and that the title to the lumber in pile passed when the contract was entered into in accordance with the intention expressed by the words “ buys ” and “ sells ” must be rejected. Had the letters f. o. b. not been used respecting this feature of the contract there might be force to the contention. See Yockey v. Noon, 101 Mich. 193; 60 N. W. 685, in which delivery required of the seller outweighed the word “sells.” See also Williston on Sales, vol. 1, p. 527, where it is pointed out that little reliance can be placed on such terms, as they are constantly used to mean “ contract to sell or contract to buy.” Reference may likewise be made to the contract in the Vogt case, sufra, where the word “ sale ” is disregarded. Furthermore, it would be idle for us to consider the several parts of the contract separately, as only the total value of the lumber in pile at Thompson at the close of the year is in evidence, no attempt having been made to value the portions of such lumber covered by the respective contract divisions contended for. Accordingly, if we can not find it the intention of the parties to pass title to all such lumber, we are in no position to disturb the respondent’s determination.

With respect to the lumber covered by the whole contract, several of the facts relied upon by petitioner may be briefly dismissed. Among these are the facts that by December 31 of the year in question the lumber was estimated and identified by being marked as sold to petitioner, whose representative had inspected it; that the petitioner was required by the contract to furnish the cars for shipments; and that payment made in January, 1921, was made in advance of shipment. The fact that the quantity and quality of the lumber in question was ascertained by an estimate and that the lumber was identified, seems not to be an affirmative indication that title is intended to pass. On the contrary, the cases cited by petitioner upon the point, as well as other cases examined, treat such ascertainment and identification as a condition precedent to the passage of title, but not as evidence of intention to pass title unless they are the last act required of the seller to put the goods in a deliverable state constituting an appropriation of goods to the contract. In cases where they are the last acts, delivery being mere acquiescence in the buyer taking the goods, title passes by such appropriation as in Richardson Lumber Co. v. Hoey, supra. See also Lingham v. Eggleston, 27 Mich. 324. Those cases are not analagous to the f. o. b. contract under consideration, the terms, of which require not merely a formal delivery but a substantial affirmative act of delivery.

Nor does the fact that petitioner was required to furnish cars for shipment in any wise detract from the force of the f. o. b. provision. To our mind this provision merely permits the seller to consider petitioner’s failure to provide cars as a breach of contract leaving the seller free to make other disposition of his product. There is nothing in the provision indicating the seller’s intent to pass title or petitioner’s intent to waive f. o. b. delivery. In the'cases cited and relied upon by petitioner in this regard, the buyer could load and ship the goods at will without consulting the seller. We are not impressed by the contention that payment was made prior to shipment. It is true that payment made in advance is evidence, perhaps not so strong as delivery, but entitled to considerable weight, of the intent to pass title. Williston on Sales, vol. 1, p. 452; Grand Rapids Bark & Lumber Co. v. Inland Township, 142 Mich. 980; Edward Hines Lumber Co. v. Wells Township, 142 Mich. 366; 105 N. W. 872. However, since payment was not actually .made until after the close of the year in question, we are unable to perceive the pertinency of petitioner’s contention except as such payment may reflect upon the intent existing prior to the close of the year.

We are thus led to the conclusion that it was not the intention to pass title to the lumber in the yard at Thompson unless the correspondence between the parties in the closing days of the year evidence such intention notwithstanding the contract requirement that the seller load the lumber on board cars. Respondent urges that said letters were written for income-tax purposes, and should, therefore, be disregarded. This position disregards the fact that men are often led to legitimate action by income-tax considerations. We do not understand the respondent’s contention to be that fraudulent means of tax evasion was intended by the parties. Accordingly, it is not the motive but the effect of the correspondence that we must consider.

Does this correspondence show the intention of the parties to the contract to pass title? On December 23, Chesbrough wrote the petitioner indicating his desire that settlement be made for the lumber in question so that proper entries could be made after the first of the year. Undoubtedly this indicated a desire to change the position of the parties with respect to the lumber within the short space of time left between the date the letter was written and time for closing and opening the books. Delivery of the lumber being then past due and a breach, if any, having already occurred, it seems the desired change in the status between the parties must be either action on the breach or completion of the sale. There is no evidence that action on the breach was in contemplation. On the contrary, the letter called upon petitioner to adjust a settlement in view of the approach of the end of the year. That a settlement was not expected as a condition to change of status is indicated by the provisions for credit in the contract itself and in the subsequent letter of December 29 in which Chesbrough submits a statement and asks payment though the adjustment of a settlement referred to in the former letter had not been made. The payment requested in advance of his completion of the contract in the later letter indicates at least willingness that "title pass by way of completion of the sale for, as matters theretofore stood, Chesbrough, not having shipped, was not in a position to demand payment. When considered together with the letter of January 5, which refers to the lumber as belonging to petitioner, we think the letters of December 23 and 29 show an intent on the part of Chesbrough to pass title before the close of the year.

Petitioner’s letter written in answer to Chesbrough’s letter of December 23, clearly interprets the latter communication as expressing a desire on the part of Chesbrough to complete the sale before the close of the year. It is equally clear that petitioner wished the sale closed so that it might take the lumber into its inventory as of the close of the year. It seems apparent from this correspondence that both parties considered the contract one to sell rather than a completed sale and took the steps they thought necessary to make the sale complete.

Had the lumber been burned at any time after December 29 could the petitioner have denied his liability therefor? We think not. The presumption that the parties did not intend to pass title until there was an f. o. b. delivery must yield to the contrary intent expressed by the parties.

The contract between petitioner and the White Marble Lime Co. is in most respects similar to the contract above discussed. Substantially similar contentions, so far as applicable, were advanced by the parties hereto in support of their respective positions. It is unnecessary to further consider the arguments and restate our con-elusions in detail. The principal distinction between the terms of the contract is in the terms of payment. The terms of the White Marble Lime Co. are not entirely clear in this regard. However, we construe the second sentence of the second paragraph of such contract to mean that settlement must be made when the lumber is estimated and the piles marked as sold to the petitioner if orders for shipment were not given by petitioner for shipment when the lumber was ready to be shipped. As the lumber in question was so estimated and marked up at the close of the year, we agree with petitioner that petitioner could have been billed for it at any time. But we can not agree with petitioner’s contention that such a liability was the equivalent of payment, and as such, strongly indicative of the intent to pass title when that liability arose. We have recognized in our discussion of the other contract that payment before shipment is weighty evidence of intent to pass title before shipment. Such intent is an inference from the fact of advance payment. The inference the petitioner would have us draw has no such factual basis.

In this contract, as in the other one, the presumption of intent arising from the f. o. b. provision must govern, unless the correspondence taking place between the parties clearly indicates the contrary intent to pass title before the close of the year. Let it suffice to say upon this point that the letters from the White Marble Lime Co. were written after the close of the year in question. Any intent to pass title shown therein was expressed after the close of the year. That being true, we must reject petitioner’s contention that the title to the lumber in pile covered by this contract passed to petitioner before the close of the year.

There remains the alternate contention that if the title is held not to pass, then an abnormal condition requiring special assessment exists. We think the contention without merit. Congress made provision for allowances in the event of losses by means of deductions in the year in which they were sustained, and in certain instances in other years. Having thus specifically granted deductions for losses in designated years, we can not ascribe to Congress an intent to permit taxpayers allowances under other and more general provisions for so-called losses not falling within the specified classes and in years other than those designated.

The deficiency will be recomputed in accordance with this opinion and the stipulation between the parties.

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

Considered by Moeeis and Muedock.


text:
    Jackson Sanatorium & Hospital Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3089.
    Promulgated December 21, 1927.

      W. Q. Sharp, O. P. A., for the petitioner.

      Brice Toole, Esq., for the respondent.
   OPINION.

Lansdon :

The only problem here is to ascertain the correct basis for the computation of gain, or loss, resulting from the sale of the property in question during the taxable year. There is no controversy over the costs of such property or the years in which the various assets were acquired. The respondent has used the depreciated cost of the .property, reflected by the books of the petitioner at August 1, of the taxable year, as a basis, and, upon such basis, has found a gain which he asserts should be included in the taxable income of the petitioner for such year. In arriving at this basis he has disregarded the value of 1913 of the property owned at that date, or has assumed that such value was equal to the depreciated cost thereof.

The petitioner alleges error in three respects: (1) That the sale price received was less than the amount asserted by the respondent; (2) that the property, acquired prior to March 1, 1913, had materially increased in value, and, at that date, was worth substantially more than cost; and (3) that depreciation charged against the property, and used by the respondent as a factor in the computation of the alleged gain from the transaction, was excessive.

The evidence introduced by the petitioner to establish the March 1,1913, value of the land consists of testimony concerning the growth in population and business of the City of Jackson between 1909 and 1913. Several witnesses testified that this growth reflected an increase in value of property within the City of Jackson. Such facts do not prove that petitioner’s property became more valuable during that period nor how much the alleged increase in value was. In the absence of evidence to support the petitioner’s claim of a value at March 1, 1913, greater than the cost, the basic value used by the respondent is approved.

Although depreciation charges against the buildings and furniture were irregular, the average charged against the buildings was less than 4 per cent per year, while the average charged against the furniture was, approximately, 7 per cent per year. The depreciation as charged on the books has been deducted from the taxable income by the petitioner in his prior income-tax returns, and has been used by the respondent in determining the basis for computation of gain from the transaction. The petitioner has offered no evidence upon which we can base any finding sufficient to overcome the determination of the respondent.

We are convinced that the Liberty bonds received in lieu of the $10,000 cash payment were worth only 96 cents on the dollar at the date of sale, and that the notes were worth their face value, as petitioner testified. It follows that the net sale price was only $39,600.

Reviewed by the Board.

Judgment will he entered on 15 days' notice, under Bule 50.


text:
    Big Rapids Electric Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 14868.
    Promulgated December 21, 1927.

      Oscar E. Waer, Esq., for the petitioner.

      J. F. Greaney, Esq., for the respondent.
   OPINION.

Siefkin :

Petitioner, in support of its contention as to the March 1, 1913, value of the property sold in 1924, introduced the testimony of two witnesses who gave, opinion evidence. The first witness had been intimately connected with the petitioner and its predecessor corporation since 1904, was familiar with the property, its operating conditions and values in that vicinity. He testified that the fair market value of the tangible properties, aside from water power, on March 1, 1913, was $40,000, equally divided between the generating plant and its equipment and the distribution system. He further placed a value of $50,000 on the 1,200 inches of water power on that date. The second witness was a civil engineer engaged in water power plant work in Michigan for a long period of years and fully qualified to testify as an expert as well as having some experience with the water power in question. His opinion was that the March 1, 1913, fair market value of the 1,200 inches of water was about $50,000. He explained that the increase between 1909 and 1913 was due, in a large part, to the rapid increase in demand for better and more electrical service, its change from the status of a luxury to that of a necessity, and the progress in transmission lines which made possible the development of water power isolated from centers of distribution.

He further gave as his opinion that water power such as this did not materially increase in value between 1913 and 1924, basing such opinion upon (1) the fact that the City of Big Eapids did not grow in population during those- years, (2) development of long distance transmission lines robbed- local.plants of the advantage of proximity, and (3) increased building costs since 1913,-electric rates remaining stationary, gave a greater value to the water power in 1913 because it could be utilized at a 'lower cost.

On the other hand, counsel for the respondent contends that such opinions are unsupported by facts upon which a reasonable opinion could be based; that there is no evidence of sales earnings and' that the evidence of costs is meaningless. Eespondent further urges that it 'is unreasonable to attribute approximately one-half of the gain in the property to the water power, whereas, the costs in water power originally were only about 10 per cent of the entire property. Ee-spondent also argues that from the increased cost of labor and materials after March 1, 1913, the gain in the value of the property sold must be attributed chiefly to the gain in the value of the physical plant rather than the water power.

We have considered these contentions of the respondent- but must disagree with them when we consider the opinions of the witnesses and the facts upon which they base those opinions. Considering all of the facts and relying upon the opinions of the witnesses, which were strengthened rather than weakened by cross-examination, we believe that the value of petitioner’s plant on March 1, 1913, was as set forth in our findings.

Reviewed by the Board.

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


author: Littleton:

text:
    Turl Iron & Car Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9255.
    Promulgated December 21, 1927.

      Frederic 0. Scofield, Esq., for the petitioner.

      P. M. CJlarJc, Esq., for the respondent.
   OPINION.

Littleton:

Petitioner’s debtors were persons engaged exclusively in the sugar industry. During the year 1921, as a result of the decline in the price of sugar during 1920 and 1921, petitioner’s debtors found themselves in the year 1921 without funds with which to make payment on their accounts. Many of these accounts represented bills for machinery contracted for early in 1920 when the price of sugar- was high and payable in the year 1921. During and at the end of 1921 petitioner knew that a considerable amount of its accounts receivable could never be collected. The Revenue Act of 1918 did not permit the setting up of a reserve for bad debts, and the Revenue Act of 1921 was not enacted until November 23, 1921. By that time petitioner was in such a dilemma concerning the matter, whether it would ever be able to collect the debts due it, that at the end of the year, instead of setting up a reserve as of January 1, 1921, and crediting thereto a reasonable addition at December 31, 1921, the directors, who were thoroughly familiar with the facts and circumstances surrounding the notes and accounts receivable, concluded that less than 50 cents on the dollar could be recovered thereon and determined that 25 per cent of the accounts receivable represented a conservative charge-off at December 31, 1921. This percentage amounted to $21,590.77. This amount was claimed as a deduction from gross income for 1921. Petitioner now claims that it was justified from the facts known to it in setting up a reserve of $9,121.94 at January 1, 1921; that it should now be permitted to set up this reserve and to deduct from gross income of 1921 the amount of $12,468.83 representing a reasonable addition to such reserve at the end of the year. We think from the evidence that it should be permitted to do this. From the facts known the petitioner would have been justified at the end of 1921 in charging off in part the debts due it in an amount at least equal to the amount which it now claims. The amount of $12,468.83 claimed as a deduction as an addition to its reserve for bad debts is in the opinion of the Board reasonable and should be allowed.

Reviewed by the Board.

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


author: Littleton. :

text:
    Washington Catering Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7051.
    Promulgated December 21, 1927.

      Bernard Greensf elder, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

Littleton. :

The Board is of the opinion that petitioner was entitled to a deduction of $18,212.87 from gross income for the taxable year, representing the unextinguished cost or March 1, 1913, value of permanent improvements made by .it to the leased premises in question. The improvements had a useful life greater than the term of the lease. The Commissioner determined a deduction for the taxable year of 8 per cent on the improvements. The lease contained no privilege of renewal. The improvements became the property of the lessor. The petitioner was entitled to exhaust its expenditures for the improvements over the term of the lease. Gladding Dry Goods Co., 2 B. T. A. 336; G. S. Stewart, 2 B. T. A. 1016.

The Commissioner contends that inasmuch as petitioner continued to use the leased premises, together with the improvements thereon, it was entitled to a deduction in.the taxable year of only a reasonable allowance for the exhaustion of the improvements which he determined to be 8 per cent. Had the petitioner upon the cancellation of the lease in question entered into a new lease for a term of years and had continued the use of the same premises in its business, we. would require it to exhaust the unextinguished cost or March 1, 1913, value of these permanent improvements over the term of the new lease. Werner & Werner Clothing & Furnishing Goods Co., 9 B. T. A. 69. However, petitioner did not make a new lease for á term of years. It merely continued to occupy the premises at will upon the solicitation of the owner. So far as petitioner’s investment was concerned, it was in no different situation than it would have been had it rented another building. Upon cancellation of the lease there was no basis for the further ratable exhaustion of the cost of the improvements unless it would be upon the basis of the remaining useful life. We think that would be carrying the matter too far.

The lease did not become obsolete in the taxable year and even if it had a fair market price or value on March 1, 1913, which had not been exhausted at the date of cancellation, such unexhausted value could not be allowed as obsolescence. At January 1, 1919, the lease had 7 years, 9 months and 13 days to run. One feature of petitioner’s business carried on in the leased premises had been prohibited but that does not prove that the lease was thereupon rendered valueless or obsolete. This probably caused the lease to be of less value to petitioner in its business; however, decline in value of property does not give rise to a deductible loss. New York Life Insurance Co. v. Edwards, 271, U. S. 109; W. P. Davis, 6 B. T. A. 1267; Corn Exchange Bank, 6 B. T. A. 158. Nor does the mere fact that property becomes of no use or of less use to a particular taxpayer in his business give rise to a deduction as a loss through obsolescence. Marigold Garden Co., et al, 6 B. T. A. 368. There is nothing in the record to indicate that the petitioner could not have sold the lease for some amount rather than cancel it. The mere fact that petitioner was given a right to cancel the lease, in the event it could not secure a license to conduct a dram shop, does not prove that whatever unexhausted March 1, 1913, value remained was deductible in its entirety in the year 1919 when the lease was canceled. The lease specifically provided that the premises were to be used in the conduct of a restaurant and in the sale of soft drinks, cigars, tobacco and liquor. Petitioner was not compelled to surrender the lease but was merely given the right to cancel it if he so desired. The lease still had a value in the conduct of the petitioner’s business as is evidenced by the fact that it continued to lease the premises from month to month at the same rental.

Two witnesses testified that in their opinion the lease, as a whole, had a fair market value of $25,000 on March 1, 1913, but from a consideration of their testimony and the entire evidence in the record, the Board is not convinced that the lease, independent of the improvements made by petitioner, had any such market value on that date. These witnesses apparently based their opinion of the March 1, 1913, value upon the lease as a whole including the improvements which had been made costing more than $32,000. The only other circumstance mentioned by the witnesses as a basis of their opinion was that sometime after the lease was executed it became known that plans were being made to erect a large hotel and a theatre within a short distance of the leased premises. On the whole the Board is of the opinion that the March 1, 1913, value claimed, independent of the cost of improvements made by the lessee, has not been established. Petitioner could probably have sold the lease on March 1, 1913, for some amount in excess of the rentals stipulated therein after it had expended large sums upon the premises for permanent additions and improvements, but these improvements do not enter into consideration of the March 1, 1918, value of the lease because the Commissioner and the Board have valued those improvements and the Board, as hereinbefore stated, has allowed a loss in respect of the unextinguished cost or March 1, 1913, value thereof. We are of the opinion that this deduction is all that the petitioner has established.

Reviewed by the Board.

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

Phillips concurs in the result.


author: Littleton :

text:
    Fred T. Ley & Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18168.
    Promulgated December 21, 1927.

      John F. Malley, Esq., and John N. O’Donohue, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
   OPINION.

Littleton :

Section 227 (a) of the Revenue Act of 1918 provides “That returns shall be made on or before the fifteenth day of the third month following the close of the fiscal year,” and section 241 (a) of that Act provides “That returns of corporations shall be made at the same time as is provided in subdivision (a) of section 227.” Sections 227 (a) and 241 (a) of the Revenue Act of 1921, approved November 23, 1921, and effective from January 1, 1921, were identical with the provisions of those sections of the Revenue Act of 1918. On March 16, 1922, Treasury Decision 3305, signed by the Commissioner and approved by the Secretary of the Treasury, was promulgated, providing as follows:

If any taxpayer has, before November 23, 1921, filed a return for a fiscal year ending in 1921, and paid or become liable for a tax computed under the Revenue Act of 1918, and is subject to additional taa> for the same period under the Reverme Act of 1921, the return covering such additional tarn may be filed at the same time as the returns of persons making returns for the fiscal year ending February 28, 1922, * * *. (Italics ours.)

On March 20, 1922, Treasury Decision 8310, amending Treasury Decision 3305, was promulgated. This Treasury decision, amending the italicized portions of Treasury Decision 3305 quoted above, is as follows:

and is subject to additional tax for the same period under the Revenue Act of 1921, a return covering such additional tax shall be filed. (Italics ours.)

The petitioner insists that under the statute and the Treasury decisions the return filed by it on June 15, 1921, was a legal return since it was not subject to any additional tax under the provisions of the Revenue Act of 1921. We are of the opinion that the position of the petitioner is correct. The Revenue Act of 1921 did not require the filing of an additional return after the passage of that Act for a fiscal year ended within the year 1921. Under the 1921 Act the Commissioner had authority to make rules and regulations and it is not claimed that he could not properly require the filing of a return under the 1921 Act if any additional tax should be due by reason of any change in the statute. The Treasury decisions plainly require the filing of a return for a fiscal year ending in 1921 after the enactment of the 1921 Act only when the taxpayer is subject to an additional tax under the provisions of that Act. The petitioner was not liable for any additional tax by reason of any difference in the provisions of the Revenue Acts of 1918 and 1921. Clearly under the facts the petitioner was not required to file a second return. It had a right to stand upon the return already made. A refiling of the same return, showing the same information and the same tax, would have been a useless formality.

The Board held in John Wanamaker Philadelphia, 8 B. T. A. 864, that a deficiency determined by the Commissioner for a fiscal year beginning in 1920 and ending in 1921 was not barred for the reason that the evidence showed that petitioner was subject to an additional tax under the Revenue Act of 1921 and was therefore required, under the law and regulations, to file a return under that Act. The Commissioner relies upon the Board’s decisions in Davis Feed Co., 2 B. T. A. 616, and Covert Gear Co., 4 B. T. A. 1025, as authority for the proposition that it was necessary to file a return after the enactment of the Revenue Act of 1921 in order to start the running of the statute of limitation. Those decisions are not in point. They involve a fiscal year beginning in 1917 and ending in 1918. The Revenue Act of 1918 made a complete change in the Federal income and profits-tax system effective January 1, 1918. Taxes for the most part were greatly increased'; invested capital was defined, larger percentages of invested capital were made deductible, and many other new features were enacted. Practically every taxpayer was subject to an additional tax for such fiscal year. If he were not subject to an additional tax there had been such changes and so many new features introduced into the Revenue Act of 1918 over the Revenue Act of 1916, as amended by the Revenue Act of 1917, as to require the filing of a return under the 1918 Act to enable the Commissioner to make an audit of the tax liability for the fiscal year. The changes in the law made it necessary to issue new and different forms of tax returns, and Form 1120, income and profits-tax return, was issued to be used by corporations in lieu of Form 1031 issued under the prior revenue acts. In Davis Feed Co., supra, the taxpayer was subject to an additional tax and, by regulations prescribed by the Commissioner by authority of law, was required to file a return under the Revenue Act of 1918. In Covert Gear Co., supra, the taxpayer was subject to higher rates of tax upon its income, but due to new provisions of the Revenue Act of 1918 it was entitled to deductions not previously allowable which, when it made its return under the Revenue Act of 1918, resulted in a less tax than had previously been shown. However, the underlying principle necessitating the making of a return under the 1918 Act was the same.

The circumstances involved in this proceeding are not parallel to the situation before the court in United States v. Updike, 1 Fed. (2d) 550, 555; Updike v. United States, 8 Fed. (2d) 913, 915. As was said by the court in Updike v. United States, returns under the Act of 1917 “obviously could not cover the increased taxes imposed by the latter Act. For the ascertainment of the latter a return would be logical and essential, and its requirement agrees with the procedure established by Congress in all revenue laws of this nature.” In the Updike case the taxpayer had failed to file any excess-profits-tax return. That case clearly is not authority for the decision of the question here involved.

Whether petitioner was subject to an additional tax under the Revenue Act of 1921 depended upon its income. This is a matter of fact. The parties have stipulated that no portion of the deficiency determined by the Commissioner “results from any change or difference in the Revenue Act of 1921 from the Revenue Act of 1918.”

Assessment and collection of any deficiency for the taxable year here involved is barred by the statute of limitation.

Reviewed by the Board.

Judgment of no deficiency will be entered.


text:
    M. Brown & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 24864.
    Promulgated December 21, 1927.

      A. E. James, Esq., for the petitioner.

      G: H. Ourl, Esq., for the respondent.
   OPINION.

Littleton :

Petitioner was not subject to any additional tax under the Revenue Act of 1921 for the fiscal year ending June 30, 1921, for which it duly filed a return prior to the approval of the Revenue Act of 1921. Under the law and the regulations, the petitioner was not required to file a second return. Fred T. Ley & Co., 9 B. T. A. 749.

The return filed by petitioner satisfied the provisions of the Revenue Act of 1921. The Commissioner had four years from the date of the filing of this return within which to determine and assess any additional tax for the taxable year. This four-year period expired in August, 1925. The assessment was not made until October, 1925, and the Commissioner’s final determination was not made until January 2, 1927. Collection of the deficiency is therefore barred by the statute of limitation.

Reviewed by the Boaed.

Judgment of no deficiency will ~be entered.


text:
    S. R. Davis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6755.
    Promulgated December 21, 1927.

      P. M. Beach, Esq., for the petitioner.

      J. B. Harlacher, Esq., for the respondent.
   OPINION.

Littleton :

Section 212 of the Revenue Act of 1921 provides:

(a) That in tlie case of an individual the term “ net income ” means the gross income as defined in section 213, less the deductions allowed by section 214.
(b) The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; * * *

Section 214 (a) of the Revenue Act of 1921 permits the deduction from gross income of individuals of ally-

(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.

Subdivision (6) of the same section provides:

* * * Losses allowed under paragraphs (4), (5), and (6) of this subdivision shall be deducted as of the taxable year in which sustained unless, in order to clearly reflect the income, the loss should, in the opinion of the Commissioner, be accounted for as of a different period. * * *

The same section also provides for the deduction from gross income of — ■

(7) Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.

Petitioner claims that inasmuch as he guaranteed the notes of the corporation and later gave his personal notes to the creditor of the corporation, he was entitled to a deduction of $42,996.74 as a worthless debt. The position of the Commissioner is that inasmuch as the petitioner kept his books of account and made his income-tax returns on the basis of actual receipts and disbursements, he is not entitled to deduct from gross income of 1921 the amount of the notes given by him as a result of the bankruptcy of the Motor Manufacturing Co. until he shall have paid them in cash.

In C. A. Collin, 1 B. T. A. 305, the Board held that a taxpayer, keeping his books of account on a cash receipts and disbursements basis, was not entitled to deduct a gain as a bad debt charged off unless the amount had previously been reported as income. In other words, the holding of the Board in that proceeding was that the income and outgo of cash were the determining factors of a return made upon the cash receipts and disbursements basis; that a taxpayer is not required to include in income, when the return is made on such basis, cash that is not received, and likewise is not entitled to take deductions when cash is not paid unless the statute clearly allows such deduction.

In John Hoskins, 7 B. T. A. 299, it appeared that the petitioner reported his income on the cash receipts and disbursements basis and issued notes to his children for services rendered. The Board in that proceeding said:

The notes constituted evidences of promises to pay certain amounts in December, 1926. Tbe giving of tbe said notes did not constitute disbursements during tbe year 1921, and upon tbe cash basis of accounting and making of tbe income-tax return tbe amounts of tbe notes are not deductible' as an expense paid during 1921. Cf. Warner L. Colvert, 6 B. T. A. 623.

When petitioner gave his personal notes to the banks they delivered the notes of the corporation'to him. He filed these notes with the trustees in bankruptcy as a claim against the Multitone Manufacturing Co., but was allowed only $703.21. We are of the opinion that petitioner is not entitled to deduct from gross income any amount on account of the notes given to the banks until he shall have paid them.

The Commissioner allowed a deduction of $389.04 and $166.66, representing payments by petitioner on the notes given by him. These amounts were proper deductions since they were paid within the taxable year; however, as to the remaining amount of the notes, petitioner was in no different situation than if he had incurred a liability in his trade or business deductible from gross income when paid, and had given his promissory notes therefor. In such case the amount of the notes would not be deductible as expense on the cash basis. J. W. Solof, 1 B. T. A. 776. The Board is of the opinion that the petitioner was not entitled to a deduction of the amount represented by the unpaid portion of his notes either as a worthless debt of the bankrupt corporation or as a loss. While he was certain that he would be compelled to pay the notes he had not yet lost anything. He had made no investment that had become valueless. He had paid out nothing that could not be recovered.

Petitioner calls attention to subdivision (6), section 214 (a) of the Revenue Act of 1921, which permits the deduction of a loss in the year in which sustained “ unless, in order to clearly reflect the income, the loss should, in the opinion of the Commissioner, be accounted for as of a different period ” and insists that this provision establishes an intent upon the part of Congress to permit the deduction of losses in the year in which the losses logically fall regardless of the method of accounting employed.

The evidence does not show that the income of 1921 is more clearly reflected by the allowance of the loss in that year than in the year in which the notes were actually paid. The Commissioner has not so found and has contended that the loss should not be allowed in that year. The evidence is insufficient to support the contention of the petitioner that the loss should more properly be allocated to 1921.

Reviewed by the Board.

Judgment will he entered for the respondent.

Smith, Phillips, and Milliken dissent.