author: Phillips: Steenhagen,

text:
    Appeal of RANDALL BROTHERS, INC.
    Docket No. 1770.
    Decided July 20, 1926.
    Bonuses paid employees in 1920 as additional compensation for services rendered in 1919 in lieu of increases in regular salaries, no legal obligation to tbe employees being incurred in 1919, are not deductible in 1919 as expenses incurred in that year.

      Edward McCarthy, Esq., and W. A. Sutherland, Esq., for the petitioner.

      Willis D. Nance, Esq., for the Commissioner.
    Before Sternpiagen, Green and Lora.
    The Commissioner determined a deficiency of $15,784.48 in income and profits taxes for the year 1919, arising from (1) the disallowance of deductions for additional compensation paid employees, and (2) the reduction of invested capital by the amount of income and profits taxes assessed on the income of 1918, prorated over the year 1919.
    FINDINGS OF FACT.
    The petitioner is a Georgia corporation ‘ with its principal office in Atlanta. It was formed, in May, 1918, by W. L. Randall and P. H. Randall, brothers, who originally held all of the outstanding capital stock, consisting of 2,000 shares of $100 par value each. It was engaged in the wholesale and retail coal and lumber business in Atlanta. W. L. Randall was president and manager in charge of the coal department, and P. H. Randall was manager in charge of the lumber department. ' The directors were W. L. Randall, P. H. Randall, T. C. Burford, R. H. Jones, Jr., and H. T. Heery.
    In 1918 the Randalls agreed to sell to certain employees and allotted to them a total of 1G5 shares of stock. These shares were not paid for by the employees and the certificates were not issued until after January 21, 1920, when the amount of bonuses or additional compensation here in question was paid.
    At the meeting of the directors in January, 1919, T. C. Burford, the secretary and treasurer, was told by the Randalls that if the business during the year showed a good profit the employees would get a substantial bonus instead of raises in salaries; that this was going to be the policy of the company. The matter was again referred to two or three times during the year. Some of the other office employees were dissatisfied with their pay. During the spring and summer of that year one or the other of the Randalls had conversations with Kendrick, Heery, Snodgrass and Spinks, of the employees, in which he promised that they would receive additional pay or bonuses, depending on the profits of the business, instead of raises in salaries. The employees relied on these promises and refrained from seeking other employment.
    W. L. Randall, the president, regarded his conversations with the various employees as committing the corporation to an obligation to divide 25 or 30 per cent of the profits at the end of the year among these employees. In this way it was thought that the corporation could pay additional compensation for the current year without establishing a new scale of salaries for the future.
    The board of directors, at a regular meeting held January 21, 1920, adopted the following resolution:
    That whereas, certain of the employees have from time to time asked for raises in their salaries and were deferred, and agreed to wait until the operations of the year were better determined by the annual audit, and,
    AVhereas, the condition of the company warrants same, and recognizing the enormous increase in the cost of living, be it therefore resolved, that additional compensation be paid as hereinafter stated to employees in the amounts set opposite their names, in consideration of the high cost of living, their untiring energies and faithful service during the past several years in the upbuilding of the company, as follows:
    W. W. Snodgrass, $3,244.67; J. J. Taylor, $5,245.30; L. Kendrick, $3,244.67; H. T. Heery, $6,489.33; A. O. Spinks, $2,733.50; R. H. Jones, Jr., $1,622.33; T. C. Burford, $5,245.30; J. M. Christian, $100.00; J. A. Parks, $100.00; M. E. Law-Ron, $100.00; R. S. Pearson, $100.00; M. E. Patterson, $300.00; J. G. Ckeek, $83.33; W. D. Bethea, $16.67; W. L. Patillo, $16.67; D. O. Cook, $25.00; O. B. Davenport, $100.00; R. E. Ellison, $75.00.
    The petitioner also allowed bonuses to employees in the years 1918 and 1920.
    The following table shows the amount of bonus paid to each salaried office employee, his regular salary, the number of shares of stock allotted to him, the years of service at 1919, and the bonuses paid for 1918 and 1920:

    These were the more valuable employees of the petitioner. They received no substantial increases in salaries in 1919 or 1920 — such increases as there were did not exceed $25 a month, except that one employee may have received $50 a month.
    The Eandalls were not formally authorized by the board of directors to make an arrangement with the employees for additional compensation. The directors and stockholders were in constant consultation with each other and it was agreed informally that the Randalls should make such an arrangement.
    The secretary prepared approximate statements in July and December 1919 for the purpose of determining what bonus was to be paid. The amounts were determined either the last of December, 1919, or the first of January, 1920, and they were paid on or about January 21, 1920. They were recorded on the books as an expense for 1919 before closing the books for the year, the entry being made in the regular course of business after January 21, 1920, but as of December 31, 1919.
    The net income for 1919 determined by the Commissioner, without allowing deduction for bonuses, was $101,130.70. The year 1919 was a year of heavy business; prices were better and there was more profit in every article. The company’s gross sales for 1918 were about $800,000; for 1919, $1,289,752.67; for 1920, about $1,400,000. The net income determined by the Commissioner for 1918 was $36,086.37.

      The gross sales by months during the year 1919 as taken from the merchandise account were as follows:
    January — $81, 632. 49
    February. 86, 368. 51
    March_ 98, 596.19
    April_ 86, 714. 41
    May_ 104, 244.13
    June_ 100, 739. 33
    July-126, 737. 65
    August_ 132, 093.14
    September. 106, 635. 72
    October 130,177.41
    November. 127, 557.49
    December. 108, 256. 20
    1, 289, 752. 67
    No dividends were paid by the company in 1919. The minutes of annual directors’ meetings in January, 1921, and January, 1922, indicate the company declared regular annual dividends only when the amount of its surplus account equaled or exceeded the amount of its capital stock.
    The 1918 income and profits taxes amounted to $14,383.98. The current earnings in 1919 were sufficient to pay in this year the 1918 taxes without drawing upon previously accumulated surplus and undivided profits. In computing net income for 1919 the Commissioner did not allow any deduction for the sum of $27,825.15 paid the officers as 1919 bonus, and reduced invested capital by the amount of the income and profits tax for 1918, prorated over the year 1919.
   OPINION.

Phillips:

The contention of the taxpayer with reference to the computation of its invested capital must, under the provisions of section 1207 of the Revenue Act of 1926, be decided adversely to it. Russel Wheel & Foundry Co., 3 B. T. A. 1168.

The remaining question is whether the additional amounts paid to employees by the petitioner in January, 1920, may be deducted in computing the net income for 1919. There is nothing in the record from which we may doubt the reasonableness of the deduction claimed. While the bonus is distributed among these employees in the same percentage as their stockholdings, the testimony discloses that the amount of stock which each employee was allowed to purchase was determined upon ivhat was considered to be the value of his services to the corporation and the distribution of the bonus was made upon the same basis. It will also be noted that these employees own 165 shares of a total of 2,000 shares outstanding, the balance being owned by the two Bandalls, who did not share in the bonus.

The Bevenue Act of 1918 provides for the deduction of:

AH tlie ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered.

It appearing that the bonus was a reasonable allowance for compensation for personal services actually rendered, it becomes necessary to determine whether these payments were incurred during the taxable year.

The testimony is that these employees were dissatisfied with the salary that was being paid to them and were in a position to procure employment elsewhere at an increased salary, that this situation was communicated to the two principal stockholders during 1919, and that during that year they made promises to distribute a bonus among these employees if the business warranted. L. Kendrick testified that sometime during the year 1919 he spoke with P. H. Bandall and states the substance of the agreement to be:

Tliat I was to receive extra pay. At tliat time business was in sueli a condition witli everything going up, tlie cost of living and everything, and lie agreed with me, if I would stay wilh him, that he would see, if the business made anything, that I would get extra pay according to what the business made.

W. L. Bandall testified:

They were dissatisfied with the amount of pay they were getting for the services they were rendering and we wanted to retain their services, and I agreed with them verbally that we would allow them 25 or 80 per cent of the net earnings of the business that year, to be divided among all the employees of both the coal and lumber departments. * * *
Q. Do I understand from you that, in the event an employee had ceased working from December 31, 1919, he would still have had a claim against your company?
A. If he had worked up through the year. I do not think though that that was brought into the agreement. Nobody didn’t expect that they would leave, but if they left right immediately, of course, they would not have participated in any of the gains.

H". T. Heery testified, concerning a conversation with T. H. Bandall:

Well, he agreed to see that we got an additional wage or bonus provided the business would allow it.

W. W. Snodgrass testified with reference to 1919:

Mr. P. H. Randall and myself talked the matters over. I worked on a commission basis strictly, and business was very plentiful in my particular Une, and I had a fixed rate of commission. Rather than increase my commission, the rate we agreed on was that we would see how business turned out at the end oí the year. Mr. Randall said he would treat me right in regard to it. * * *
Q. Did Mr. Randall say anything to you about paying you any percentage of the profits, paying employees any percentage of the profits?
A. No, sir. I don’t think there was anything like that said * * *. He said he would treat us right; that I would not have any reason to complain.
Q. You always found him a man that lived up to what he says?
A. Yes, sir, absolutely, both of them.
Q. Did you or not feel sure after the conversation that you would be treated as well as the business justified?
A. Yes, sir, I was perfectly satisfied.

A. C. Spinks testified concerning a conversation with W. L. Randall during 1919 as follows:

I told Mr. Randall that I felt like I was worth more money than the amount he was paying me; that I was handling a larger volume of business; that I had been with him some time; and that higher salaries were being paid to almost everybody in every line; I felt like X was due more money. Mr. Randall assured me he would take care of me. Knowing Mr. Randall like I did, I knew he would do it. * * *
Q. As I understand your testimony, there was no specific amount stated at this time in the spring of 1919?
A. No.
Q. Merely that Mr. Randall would treat you right, or something to that effect?
A. That’s right.

T. C. Burford testified with reference to his knowledge concerning the bonus:'

It was during the latter part of January, 1919, at the first directors' meeting that was held in that year, which meeting was the final meeting covering 1918 business. I was told that if the business showed a profit worth while during the year that instead of a raise of salary I would get a substantial bonus; that that was going to be more or less the policy of the company rather than to increase salaries. * * * in my conferences with the president, W. L. Randall, the matter, as well as I remember, was referred to, I would say, some two or three different times during the year, and the sum and substance of the conversation regarding it was substantially what he said to me in the previous meeting; the meeting at the first of the year.

One witness testifies that the agreement was to distribute between 25 per cent and 30 per cent of the profits of the business as a bonus. On the other hand, we have no such testimony from any of the other witnesses, all of whom indicate that the amount to be distributed was extremely indefinite and to all practical intents and purposes was to be determined by the two Randalls. Two of such witnesses deny that there was any agreement as to the amount or percentage of the profits to be distributed. We do not believe that in such circumstances any legally enforcible obligation to the employees had been incurred. Neither the amount to be paid each employee, the total amount or percentage of the profits to be' distributed as a bonus among all employees, nor tbe proration among the employees of the amount finally determined, had been agreed upon.

Counsel for the taxpayer cite several instances where agreements to pay additional compensation or bonus have been upheld by the courts, but in each such instance there was an agreement sufficiently definite to fix the compensation or the manner of computing the compensation. Here we have neither. It is true that there was a moral obligation, but even this obligation was so indefinite that its interpretation depended upon the understanding and good business judgment of the two Randalls.

It is urged that these persons had been associated for many years, that the agreement was as definite as amicable business relations required, and that under such circumstances the solemn and binding effect of the understanding must be recognized to the same extent, as the parties themselves were willing to recognize it. There is much merit in the suggestion, which was fully considered by the Board at the time of its decision in the Appeal of Van De Kamps Holland Dutch Bakers, 2 B. T. A. 1247. The Board then reached the conclusion that compensation for services is deductible only in the year in which a legal obligation is incurred, and we believe the decision in that appeal covers the decision in this. Appeal of Arter Paint & Glass Co., 2 B. T. A. 1256.

The deficiency is redetermined to he $15,-784-48. Order of redetermination will he entered accordingly.

Steenhagen,

dissenting: While this is a close case, upon which I recognize room for difference of opinion, it seems to me that the petitioner has brought itself within the statute as having incurred the expense of these additional salaries in 1919. It was in that year that the employees were threatening to quit, that the managers promised them greater compensation, that the employees acted on the promise, and that the earnings were derived from which the added compensation was to be paid and the promise kept. The expense was incurred at once and the details of it were to be worked out later. This was enough for everyone concerned to recognize as binding and to act upon, and the employees acted upon it in 1919 by carrying on. The obligation was as real to these amicable associates in 1919 as if it were written. Its existence in that year is not in my opinion made less effective for tax purposes by reason of the fact, if it be true, that it could not be enforced until after the close of the year.

Geeen, Lansdon, and Thus sell concur in this dissent.


source: Caselaw Access Project

license: Public Domain

text:
    Appeal of MARJORIE L. SARGENT.
    Docket No. 3678.
    Decided July 20, 1926.
    The value of shares of stock at December 25, 1917, determined.

      Stephen G. Bush, G. P. A., for the petitioner.

      G. II. Gurí, Esq., and A. II. Murray, Esq., for the Commissioner.
    Before Smith, James, LittletoN, and Trttssell.
    The taxpayer appeals from the determination of a deficiency in income tax for the year 1920 in the amount of $70,772.29, and of a penalty for delinquencj'- in filing return for that year of 25 per cent of the amount of the tax, or $17,693.07 — total $88,465.36. The point in issue is the value of certain shares of stock received by the taxpajrer as a gift on December 25, 1917.

       This decision was prepared during Mr. James’ term of office.

   FINDINGS OE PACT.

1. On December 25, 1917, the taxpayer received as a gift from her husband, LeRoy Sargent, 10,000 shares of the common stock of the Commonwealth Finance Corporation. She sold 9,016 shares of this stock in 1920 for $189,336, or at the rate of $21 per share. She filed no income-tax return for the year 1920. The Commissioner has determined that the fair market price or value of the shares of stock on December 25, 1917, was $2.73 per share, and that the difference between that amount and $21 constitutes the gain or profit upon each share of the stock sold in 1920. By reason of the fact that the taxpayer was delinquent in the filing of such return, the 25 per cent penalty imposed by section 3176, Rev. Stats., as amended by section 1317 of the Revenue Act of 1918, is proposed for assessment.

2. During the years 1916 and 1917, LeRoy Sargent transacted business under the name of Sargent & Co. This was a sales organization engaged-in the business of financing and underwriting securities. It was a very large organization, having about 58 branch offices and about 600 salesmen throughout the country.

3. In 1916, a corporation was organized under the laws of South Dakota, under the name of Metropolitan Finance Co., which name was soon changed to Commonwealth Finance Corporation. This corporation will be hereafter referred to as the Finance Corporation. It was organized for the purpose of financing the paper of automobile dealers, notes that dealers give for payment of cars, and obligations of dealers to manufacturers for cars purchased or contracted for. It was also intended to do such other financing as might be incident to its main business. The authorized capital stock of the corporation was $10,000,000 — 7 per cent preferred stock and $7,500,000 common stock, each share of a par value of $100.

This corporation entered into a contract with Sargent & Co. under date of July 1, 1916, which provided that Sargent & Co. should sell the preferred stock of the Finance Corporation at $100 per share and that the Finance Corporation should receive $100 cash in respect of each share sold. The $7,500,000 common stock was to be issued to Sargent & Co. and Sargent & Co. was immediately to turn back to the Finance Corporation $5,000,000 of the common stock, which was to be retained in the Finance Corporation’s treasury for the purpose of being issued as bonus stock with the preferred stock sold by Sargent & Co. Not to exceed one-half share- of common stock was to be issued as a bonus with each share of preferred stock sold. Any amount that was received either by Sargent & Co. or the Finance Corporation for each share of preferred stock accompanied by any bonus of common stock in excess of the .par value of the preferred stock was to be paid over to Sargent & Co. It was further provided that, if the preferred stock should all be sold and there should then be remaining in the treasury of the Finance Corporation any shares of common stock, such shares should be turned back to Sargent & Co. as part of its commission in the sale of the preferred stock. Sargent & Co. were to have ten years within which to complete the sales of the preferred stock.

4. In carrying out the contract, Sargent & Co. devoted its entire energies to the sale of this stock. None of the preferred stock of the Finance Corporation was sold, except through Sargent & Có., to January 1, 1918. Sargent & Co. extensively advertised the stock and made a practice of selling a share of preferred stock and one-fourth share of bonus common stock as a unit for $125. Of the $125 received for each unit sold Sargent & Co. received $25.

Up to December 31, 1917, inclusive, 44,395 shares of preferred stock had been disposed of, of which 14,911 shares had been fully paid up and issued to the purchasers; and 29,484 shares had been subscribed for but not fully paid for. Of the common stock at the same date, 44,01614 shares were held as treasury stock, 5,983% shares had been issued to purchasers of preferred stock as per the agreement made with Sargent & Co., and 25,000 shares had been issued and retained by Sargent & Co.

5. The gross income of the Finance Corporation from the date when it began business, November 17, 1916, to December 31, 1917, was:

Gross income from brokerage, insurance and interest_$276, 338.44

Less: Operating and general expenses-$139, 853. 66

Provisions for contingencies_ 5, 976. 78

- 145, 830.44

Net profit. 130, 508. 00

The balance sheet as at December 31, 1917, reads as follows:

Current assets:

ASSETS.

Cash- $279,198. 96

Notes receivable—

Purchased- 1, 508,146. 62

Secured by merchandise_ 61, 901. 84

Advances for automobile dealers (secured)_ 291,813.84

Accrued interest_ 20, 836. 03

Acquired car accounts_ 12, 985. 86

Subscriptions to preferred capital stock_ 2, 350, 473. 36

Investment — U. S. Liberty Loan 4%s — at cost- 16, 231. 50 Accounts receivable_ 831. 86

Total current assets_1_$4, 542, 419.87

Furniture and fixtures — less reserve_ 11,131. 39

Deferred assets:

Underwriting expense and common stock bonus, less premiums on preferred stock issued - 3, 098,375. 00

Organization expense_ 26, 720. 53

Stationery, office supplies and printing_ 2,074. 55

Suspense accounts_ 62. 40

- 3,127,232.48

7, 680, 783.74

liabilities.

Accounts payable_ $31, 661. 46

Preferred dividends payable_ 26, 500. 00

Reserve for contingencies_ 5, 976.78

Capital stock:

Authorized—

100,000 shares preferred $100 par value_$10, 000, 000. 00

75,000 shares common $100 par value_ 7, 500, 000. 00

Total authorized_ 17, 500, 000. 00

Issued—

14,911 shares preferred $100 par value— 1, 491,100. 00 75,000 shares common $100 par value 7, 500, 000. 00

Total issued_ 8, 991,100. 00

Less Treasury stock_ 4, 401, 625. 00

Total outstanding- 4, 589, 475. 00

Preferred capital stock subscribed, not yet issued_ 2, 948, 400. 00

Surplus—

Profit from Nov. 17,1916, to Dec. 31,1917- 130, 508. 00

Less 7% preferred stock dividends_ 51, 737. 50

- 78, 770. 50

7, 680, 783.74

The books of account of Sargent & Co. show that during the four weeks ended March 2,1918, Sargent & Co. sold 44 shares of Commonwealth Finance Corporation common stock at par. Orders for this stock were received in response to circulars sent by mail to different prospects. Orders for 12 shares were canceled immediately after receipt, and the $1,200 sent with the orders was refunded to the purchasers. The books of account also show the receipt by Sargent & Co. of 50 per cent commission on the par value of 6 shares of Commonwealth Finance Corporation preferred stock sold at $150 carrying a bonus of % share of common stock. These sales were made on December 22, and December 29, 1917.

The fair value of the common stock on December 25, 1917, was $13.25 per share. The profit on the sale of 9,016 shares in 1919 was $69,874.

The taxpayer was delinquent in filing an income-tax return for the year 1920. The penalty for delinquency in the filing of a return proposed for assessment by the Commissioner is legally due.

Order of redetermination in accordance with the foregoing findings of fact will be entered on 15 days'1 notice under Bule 50.


author: GReen:

text:
    Appeal of M. FOX & SONS CO.
    Docket No. 5645.
    Decided July 21, 1926.
    Petitioner asserts that it is entitled to relief under sections 327 and 32S of the Revenue Act of 1918. Commissioner affirmed without consideration of merits of case because of insufficiency of proof.

      Charles H. Schnepfe, C. P. A., for'the petitioner.

      Joseph K. Moyer, Esq., for the Commissioner.
    Before Marquette, Mokeis, Green, and Love.
    In its income and profits-tax returns for the year 1919 the petitioner asserted that it was a personal service corporation and made its return as such. The Commissioner decided that it was not entitled to such classification and determined that there was a deficiency in income and profits taxes for the year in the sum of $8,052.17. , The petitioner, apparently acquiescing in the Commis•sioner’s conclusion that it was not entitled to classification as a personal service corporation, now asserts that its case is within the provisions of section 327 of the Revenue Act of 1918 and that it is entitled to have its tax determined as provided in section 328 of that Act.
    FINDINGS OF FACT.
    M. Fox & Sons Co. is a Maryland corporation with its principal place of business in Baltimore. During the year in question it operated an auction sales stable in which it sold horses and mules on commission. It also from time to time purchased horses and mules on its own account and sold them at its auctions. During the greater part of the year it carried on or held auction sales for the Government, at which it sold.horses and mules. Later in the year this activity was enlarged to include the sale of automobiles. These sales of Government property produced a substantial portion of its income.
   OPINION.

GReen:

Section 327 of the Revenue Act of 1918 sets forth the cases in which the tax shall be determined as provided in section 328. There is no direct evidence that the Commissioner was able to determine the invested capital of the corporation, but it is obvious that he has done so. This eliminates paragraph (a) of section 327. Paragraphs (b) and (c) are inapplicable. Paragraph (d) relates to abnormalities affecting capital or income. We are unable to ascertain from the record the amount of invested capital allowed by the Commissioner and there is no evidence of any abnormality of either capital or income.

The deficiency is $8,052.17. Order will be entered accordingly.


author: GREen:

text:
    Appeals of MARION H. KENNISH, BERTHA E. COPELAND, PERCIVAL W. COPELAND, W. R. KENNISH, and ARTHUR HIND.
    Docket Nos. 1630-1634.
    Decided July 21, 1926.

      O. R. Dewey, Esg., for the petitioners.

      Robert A. Littleton, Esg., for the .Commissioner.
    Before GRAupneR, Littleton, and Geeen.
    These appeals are from a determination by the Commissioner of deficiencies in income taxes for the year 1920, in amounts as follows:
    Marion I-I. Kennish_$4,037.48
    Bertha E. Copeland_ 3, 655.76
    Percival W. Copeland___ 2, 316.19
    W. R. Kennish_ 6,449.15
    Arthur Hind_ 32,232.49
    The deficiency in each appeal arose from the action of the Commissioner in treating as taxable income certain cash dividends received by the taxpayers in the year 1920 from Hind & Harrison Plush Co., a corporation. These dividends are claimed by the taxpayer to have been the surplus, earnings and profits accumulated by said corporation prior to March 1, 1913. With the exception of the amount of dividends received,, the essential facts -are identical in each appeal.
    FINDINGS OF FACT.
    The petitioners are residents of the Village of Clark Mills, N. Y., with the exception of Arthur Hind, who is a resident of the- City of Utica, N. Y.
    The Hind & Harrison Plush Co. was a domestic corporation organized and doing business under the laws of the State of New York. On November 30, 1919, its books showed a surplus of $1,460,-192.26, which, after deducting the reserve for taxes amounting to $343,351.20, left a surplus of $1,116,841.06. Of this latter amount, the sum of $295,699.92 was surplus, earnings and profits accumulated prior to March 1, 1913.
    On January 2, 1920, the board of trustees of the said corporation passed a resolution as follows:

      On motion, duly seconded and carried unanimously, it was decided to pay this day a stock dividend of 101.875% on the Common Stock to all holders as of record on November 30th, 1919, in the following proportion: 25% Common Stock and 76.875% Preferred Stock, making the Capital fully paid up into 81,000,000.00 Common and $800,000.00 Seven Per Cent Preferred.
    On motion, duly seconded and carried, it was decided to pay a cash dividend of 30% on January 5th, 1920, to all holders of Common Stock as of record on that date. As part of this dividend is not subject to taxation, being from surplus accumulated prior to February 28th, 1913, the Secretary was instructed to notify each stockholder of the proportion of dividends taxable and that portion not taxable.
    On January 2, 1920, the corporation, pursuant to said resolution, distributed stock of the par value of $815,000 to its stockholders as a stock dividend, and on January 5, 1920, it paid a cash dividend of $300,000. The cash dividend, with the exception of $6,141.14, was recorded on the books of the corporation as a distribution from surplus, earnings and profits accumulated prior to March 1, 1913, and the stockholders were so notified. The taxpayers herein were stockholders of said corporation and the respective portions of said cash dividend received by them are the amounts treated as taxable income by the Commissioner and over which the controversy herein arises.
    The Commissioner refused to recognize the said stock dividend as a distribution of the surplus, earnings and profits accumulated since March 1,1913, and treated the cash dividend as a distribution out of surplus accumulated since March 1,1913, which action resulted in the alleged deficiencies as above set forth.

       This decision was prepared during Mr. Graupnei^s term oí office,

   OPINION.

GREen:

The issues involved in these appeals are identical with that in the Appeal of Hugh R. Wilson, 3 B. T. A. 957. The deficiencies are in accord with the reasoning and authority of that case.

Judgment for the Commissioner.


author: GREEN:

text:
    Appeal of IRON CITY IMPROVEMENT CO.
    Docket No. 2138.
    Decided July 21, 1926.
    Exhaustion, wear, tear, and obsolescence: Bate of 5 per cent held to be proper under the circumstances.

      Maynard Teall, Esq., for tlie petitioner.

      Blount Ralls, Esq., for the Commissioner.
    Before Smith, Littleton, and GReen.
    The taxpayer appeals from determinations of deficiencies for the years 1918 to 1921, inclusive, totaling $16,384.84. It contends that the deduction for exhaustion, wear, tear, and obsolescence of its building should have been computed at the rate of o per cent, and the Commissioner contends that the correct rate is 2 per cent. The parties are in accord on the value of the building.
    FINDINGS OF FACT.
    The Iron City Improvement Co. is a Pennsylvania corporation with its principal place of business at Pittsburgh. So far as the record discloses, its only business is that of owning a building, situated in the City of Pittsburgh and known as the Fort Pitt Hotel. This building is leased to the Pittsburgh Hotels Co., which company operates a hotel therein and also operates the William Penn Hotel located in the same city.
    One section of the taxpayer’s building (six stories in height) was erected in 1906 and the other section (seven stories in height) was erected in 1901. The plan and construction of the building is that common to hotel buildings erected at the same time. The rooms, of which there are approximately 100, are larger than the average rooms of the modern hotel, and 268 of them have no bath facilities or running water therein. The halls are dark and narrow and the light courts are narrow and inadequate. The lobby is of insufficient size and poorly designed, and the elevator arrangement is poor and insufficient. The hotel is located within four blocks of the Pennsylvania Railroad Station. At the time it was erected, there were in the neighborhood high class retail stores and the district was generally classed as a retail district. Within the last few years, however, retail and financial businesses have been gradually moving away from this section of the city, which is now occupied almost entirely by steel mills, freight yards, wholesale houses, and warehouses. The railroad freight station is on one side of the building, steel mills and wholesale furniture houses on another, more furniture houses on another. In the rear are the tracks of the Pennsylvania Railroad, and on Penn Avenue there are a few small shops occupied and operated by foreigners, some of whom are Chinese. There are a considerable number of Chinese living in the immediate vicinity. This section of the city, because of its proximity to these mills and railroads, is dirtier than the retail section and the section where the William Penn Hotel is located.
    The business of the hotel has been gradually falling off for a number of years, due primarily to the erection and successful operation of the William Penn Hotel and to the change in the location of the retail and financial business. There are on foot several projects to erect another modern hotel in the city, and it seems certain that such a hotel will be erected within ten years. The erection of such a hotel would materially reduce the patronage of the Fort Pitt Hotel and the profit to be derived therefrom.
    The building is deteriorating very rapidly, particularly the steam and plumbing pipes. The taxpayer has completed plans for remodeling a portion of the ground floor so as to make it suitable for retail stores, but has been unable to secure tenants for the rooms when remodeled. The building is not suitable, either in design or location, for use as an office building, and the construction is not sufficiently strong to warrant its use as a warehouse. The building has a useful life of not to exceed 20 years from January 1, 1918.
   oiunion.

GREEN:

The taxpayer bases its claim for exhaustion, wear, tear, and obsolescence rate of 5 per cent upon an alleged limited useful life of its building. Several witnesses were produced in its behalf, all of whom testified that in their opinion the useful life of the building was limited to ten years, and that at least by that time it would be economically impractical to operate the building. It is clear that the building is far from modern, that it is poorly localed and that the business of the tenants is steadily falling off. It seems to us that the rate of 5 per cent for exhaustion, wear, tear, and obsolescence, as contended for by the taxpayer is, in the light of all the circumstances, reasonable and proper, and we so hold.

Order of redetermination will he entered on 10 days' notice, under Bule 50.


author: Smith

text:
    Appeal of STRUTHERS-WELLS COMPANY.
    Docket 3943.
    Decided July 21, 1926.
    The evidence of record does not prove such an abnormality of invested capital or income as warrants the determination of tax liability under section 328 of the Revenue Act of 1918.

      Arthur J. Fa/fber, O. P. A., for the petitioner.

      Ward Loveless, Esq., for the Commissioner.
    Before Smith, Littleton, and Tetjssell.
    This is an appeal from the determination of deficiencies in income and profits tax for the years 1917 and 1918 of $14,444.15 and $4,080.33, respectively. The only allegation of error is that the Commissioner- has refused to determine tax liability under the provisions of section 210 of the Revenue Act of 1917, and section 328 of the Revenue Act of 1918 for the years 1917 and 1918, respectively.
    FINDINGS OP FACT.
    The taxpayer is a Pennsylvania corporation with its principal office at Warren. It was incorporated August 14, 1902, and acquired the assets and assumed the liabilities of the partnership of Struthers-Wells Co. as of January 1, 1902. Included in the assets purchased were items of property and plant which were entered on the books of the taxpayer corporation as of January 1, 1902, at the following valuations:
    Real estate_$175,317.72
    Tools and machinery_ 203, 081.76
    Patterns___ 135,231. 25
    Drawings- 14, 901. 07
    528, 531. 80
    These values were allowed by the Commissioner in the computation of the taxpayer’s invested capital for the years 1917 and 1918.
    The sales and the book profit or loss from the operations of the taxpayer for the years 1902 to 1911, inclusive, were as follows:

      A certain agreement was entered into on June 28,1912, between the stockholders of the taxpayer and certain of its employees, which agreement remained in effect until December 20, 1913. This agreement was to give effect to an employees’ profit-sharing plan. The points covered by it are briefly as follows:

      1. Tlie Struthers-Wells Oo. shall be reorganized.
    2. The capitalization consisting oí 20,000 shares of common capital stock, par value $25 per share, total par value $500,000, shall be increased to $000,000 par value and divided into 3,000 shares each of common and preferred capital stock, par value $100 per share.
    3. The stockholders shall transfer to certain employes o'f the company all of the common stock, consisting of 5,000 shares, par value $100 each, subject to certain terms and conditions.
    4. The principal terms and conditions under which these employes shall receive this stock are as follows:
    (a) There shall be transferred to the employes each year stock in an amount proportionate to the reduction of the indebtedness of the company, which as of October 31, 1911, amounted to $289,500.
    (b) Additions and betterments to plant and equipment in excess of the annual and special depreciation charges shall be considered as applying against the reduction of the indebtedness of the company.
    (c) The earnings of the company shall be distributed in the order shown below:
    Payment of dividends on preferred stock for the current year.
    $20,000.00, or any part thereof, as may be decided by the Board of Directors to be available, to be used to retire the outstanding indebtedness.
    Necessary and advisable enlargements and betterments of the plant.
    Payments of dividends on common stock, such dividends shall not exceed 3% in any one year.
    Further retirement of outstanding indebtedness.
    (d) If any of the employes to whom stock had been allotted ceased to be identified with the business of the company, the stock, which had been allotted to him and not transferred, shall become treasury stock and also the company shall have the right to purchase the stock held by such employe at $50.00 per share.
    (e) None of the stock transferred to employes under this agreement shall be sold by them without first giving the company the privilege of purchasing the same under the terms as outlined under section (d).
    (f) Payments of dividends on common stock shall be in accordance with the provisions of section (c) and such dividends shall be paid upon the stock allotted rather than the stock transferred.
    (g) Preferred and common capital stock shall have equal voting power.
    (h) The salaries of the employes to whom stock is allotted shall not be increased during the period that this agreement is in force, over or above the amounts of the salaries at this date as fixed by the Board of Directors of the company, without the consent of the majority interest of the stockholders of the company.
    (i) When all of the outstanding indebtedness shall have been liquidated in accordance with and subject to the conditions outlined in the foregoing, all of the preferred stock shall be retired or cancelled, and there shall be issued in lieu thereof to the owners in full payment of the same an equal amount of common stock, after which all stock of the company shall share alike in the distribution of dividends and be treated the same in all other respects.

      The Commissioner determined the taxpayer’s liability to profits tax for the years 1917 and 1918 under the provisions of section 201 of the Revenue Act of 1917 and section 301 of the Revenue Act of 1918. In a letter addressed to the taxpayer on February 19, 1924, the Commissioner stated that the claim of the taxpayer for relief under section 210 of the Revenue Act of 1917 had been considered and relief denied for the reason that the excess-profits tax was not in excess of the average excess-profits tax paid by a group of companies which he considered comparable with the taxpayer. The taxpayer sought relief from the excess-profits tax determined for the year 1918, under the provisions of section 328 of the Revenue Act of 1918, but the request for such consideration was denied.
    Prior to the date of the contract entered into on June 28, 1912, between the stockholders of the taxpayer and certain of its employees, the taxpayer had paid no dividends upon its stock and was making little money. For, 1912 and for subsequent years the taxpayer has had a net gain each year and has had large earnings for the years subsequent to 1914. Of the 15 employees who signed the contract in 1912, all except one, who died in 1914, were still in the employ of the company in 1918.
   OPINION.

Smith

: At the hearing of this appeal the taxpayer offered in evidence a copy of an appraisal made by certain appraisal engineers as of February 1,1902, which appraisal was made on or about that date. The business was then being conducted as a partnership and the appraisal was for the purpose of determining the values of the assets as of the date of incorporation. The books of account were to some extent changed to represent the values determined by the appraisal engineers. The appraisal offered for the purpose of showing that the invested capital of the Struthers-Wells Co. was not fully stated upon the taxpayer’s books of account in 1902 — as indicating that there was in the possession of the company statements made by persons whom they considered to be competent to make such statements showing a higher value. The Commissioner objected to the introduction of the appraisal for the purpose of showing the value of the assets in 1902, on the ground that the persons making the appraisal were not before the Board and therefore not subject to cross-examination, and his objection to the introduction of the appraisal for the purpose of proving a value of the assets in 1902 in excess of the amount placed upon the books of account by the officers in 1902 was sustained. The only other evidence introduced by the taxpayer in support of its claim that abnormalities in invested capital and income existed for the years 1917 and 1918 was a copy of an agreement entered into between the then stockholders of the company and certain of its employees on June 28, 1912, which agreement has been briefly summarized in our findings of fact, and also the testimony of the person who was vice president and general manager of the corporation during the years 1917 and 1918. He testified that, in his opinion, the profits of the company during the years 1917 and 1918 were largely attributable to the contract and its effect upon the stockholder employees.

The taxpayer argues that the Commissioner admitted abnormalities for the year 1917 by the fact that he considered its claim to relief for that year under section 210 of the Revenue Act of 1917, when the excess-profits tax was only 24.9 per cent of the taxable income; that the same abnormalities of invested capital and income existed for the year 1918, when the profits tax was 58.1 of the taxable net income.

So far as the year 1917 is concerned, the taxpayer has submitted no evidence which would tend to prove that the Secretary of the Treasury was unable satisfactorily to determine its invested capital for the year 1917. That is the only basis for affording the computation of tax liability under section 210 of the Revenue Act of 1917. Upon the record, the refusal of the Commissioner to grant any relief under section 210 of the Revenue Act of 1917 to this taxpayer in respect of its tax liability for 1917 must be approved.

In our opinion the evidence adduced before the Board does not prove the taxpayer’s claim to such an abnormality of invested capital and income for 1918 as entitled it to consideration under the relief provisions of the taxing statutes. It is true that the profits tax for the year 1918 upon this corporation was onerous. But this was the case with a great many corporations. They simply earned a large net income ’upon-their invested capital. The statute provides that this condition alone is not enough to warrant relief under the provisions of section 328 of the Revenue Act of 1918.

■The deficiencies m proftts-iax for the years 1917 and 1918 are $lf,]M..15 and $f,080.33, respectively. Order will be entered accordingly.


author: Smith:

text:
    Appeal of WHITNEY COAL MINING CO.
    Docket No. 4933.
    Decided July 21, 1926.

      Willard M. Whitney for the petitioner.

      George G. Witter, Esq. for the Commissioner.
    Before Smith, Littleton, and TRtjssell.
    This is an appeal from the determination of a deficiency in income and profits tax for the year 1919 in the amount of $1,314.07. The deficiency results from the disallowance of tlie claim of the taxpayer that it was a personal service corporation during 1919. The taxpayer does not base its appeal upon such disallowance, but upon the claim that it is entitled to deduct from gross income $35,400 for salaries of officers, instead of the amount of $5,400 claimed on its original personal-service-corporation tax return for the year 1919.
    FINDINGS OF FACT.
    The taxpayer was incorporated under the laws of Pennsylvania on February 26, 1918, and began business on July 1, 1918. It succeeded to the assets and business of a partnership, which began business on January 1, 1918. There were three members of the partnership, namely, Willard M. Whitney, Mae A. Kelley, and John P. Kelley. The capital stock of the corporation was $15,000, and each of these individuals paid $5,000 for $5,000 par value of the capital stock. These individuals constituted all of the stockholders and all of the officers of the taxpayer during 1919, Willard M. Whitney being president, Mae A. Kelley, secretary and treasurer, and John P. Kelley, vice president.
    The taxpayer was, during the year 1919, in the business of buying and selling coal, under an arrangement whereby it purchased coal from various operators at one price, sold it to customers at another price, made the bills to the customers due before the bills from the operators, and from the proceeds thereof paid the operators. It never owned any mines but its officers were interested in certain mines, the coal of which the taxpayer chiefly sold. Besides the officers above named, the taxpayer had a business organization consisting of an extra stenographer and a bookkeeper and one salesman.
    At a meeting of the board of directors of the corporation on March 14, 1918, the compensation of the officers for the ensuing year was fixed as follows:
    Willard M. Whitney, president-$13, 600
    Mae A. Kelley, secretary and treasurer- 11, 800
    John P. Kelley, vice president- 10, 00Q
    It was provided, however, that if the officers should receive said salaries, or a pro rata part thereof, from the partnership, or if the salaries should be chargeable against the partnership, “ then said salaries or the pro rata part thereof of the officers shall not commence until July 1, 1918.” At a meeting of the board of directors held March 3, 1919, the following minute was adopted:
    Upon motion duly seconded and unanimously passed the compensation of the officers for the ensuing year was fixed as follows:
    For year.
    $13, 600 President_
    10, 000 Vice president-
    11, 800 Secretary and treasurer.

      At the end of the year 1919, the taxpayer found that it did not have sufficient profits from which to pay the salaries it had voted, and the directors agreed among themselves that they would draw only $5,400 of the total amount authorized, and that this amount would be shared by Willard M. Whitney and Mae A. Kelley, and that John P. Kelley would draw no salary whatsoever for the year 1919.
    Following this agreement, the bookkeeper of the company was advised of the agreement and made an entry in the books crediting the full amount of salaries to the officers. Later he charged back to the officers all except $5,400, which amount was actually paid to the officers, Willard M. Whitney and Mae A. Kelley.
    The corporation, in its tax return filed for 1919, claimed a deduction of only $5,400 as salary paid to its officers and was allowed that deduction.
    The taxpayer had a very successful year in 1920 and reported in its tax return for that year a net taxable income of over $92,000. Salaries during that year were paid to its officers at the rates shown in the minute of the meeting of the board of directors of March 3, 1919, that is, the total officers’ salaries paid for the year was $35,400. It paid nothing in that year, however, nor has it since paid anything on account of officers’ salaries undrawn in the year 1919.
    After the deduction from gross income of $5,400 for officers’ salaries for the year 1919, the taxpayer returned a net income of $7,525.78. If the taxpayer had deducted from gross income $35,400 for compensation of officers, its return would have shown a net loss for the year of $22,474.22.
    The taxpayer’s books of account for the year 1919 were kept on the accrual basis.
   OPINION.

Smith:

The taxpayer paid to its officers during the year 1919 $5,400. In March, 1919, the taxpayer had agreed to pay its officers salaries of $35,400. By reason of the fact that it did not earn enough to pay the full amount of salaries, there was an agreement among the officers that the full amount should not be paid. The evidence is not clear as to whether this agreement resulted in a relinquishment on the part of the officers of the undrawn salaries, or whether there was merely an agreement that the payment of them should be deferred. The income-tax return of the corporation, made out by the bookkeeper but executed by the president, and secretary and treasurer, shows the deduction from gross income of only $5,400 for salaries of officers. Although the taxpayer earned a large amount of money in 1920, no back salaries were paid to the officers and no back salaries have been paid, up to the present time. In view of this fact, the Board is of the opinion that the amount of officers’ salaries which was an expense to the corporation in 1919 was only $5,400.

Order of redetermination will be entered on 15 days’ notice, under Rule 50.


text:
    Appeal of ROCKFORD BRICK & TILE CO.
    Docket No. 3873.
    Decided July 22, 1926.
    In 1915 the taxpayer charged to surplus certain improvement accounts shown by its hooks. Held, upon the evidence, that the taxpayer is entitled to include in invested capital the depreciated cost of the improvements charged to surplus in 1915.

      G. B. Stiver, Esq., for the petitioner.

      George G. Witter, Esq., for the Commissioner.
    Before Smith, Littleton, and Teussell.
    This is an appeal from the determination of a deficiency in income and profits tax for the fiscal year ended January 31, 1920.
    The taxpayer alleges a number of errors in the computation of the deficiency, but at the hearing all allegations of error were abandoned except such as relate to an inclusion in invested capital of $34,099.77, which amount, represents a reinstatement in surplus account of certain improvement accounts charged of its books in 1915.
    FINDINGS OF FACT.
    The taxpayer is an Iowa corporation with its, principal office and factory at Rockford. It was incorporated in 1910 and is engaged in the manufacture of brick and tile and other clay products. It now has 16 kilns. It started operations in 1910 or 1911, after the completion of 3 kilns. At that time it had a main building, which consisted of one engine-room large enough for a 300-horsepower engine, and next to that a boiler-room containing two 150-horsepower boilers. There was also a main machinery building, one story in height, approximately 300 feet long, 150 feet wide, and 40 feet high. By this main machine room was a drier containing 8 tunnels, with two tracks each, making a 16 track drier. The main machine room housed the plant, the puddle mill, the rollers, the feeders, and all such devices. The actual construction cost of buildings, tunnels, etc., prior to the time of starting operations was between $31,000 and $32,000.
    Immediately after starting operations, the taxpayer began to enlarge its plant. It added additional kilns from year to year and also additional tunnels. These kilns are what are commonly termed “round down draft kilns,” the majority of them being 26 feet in diameter, measuring from the inside walls. A few are 30 feet in diameter. The walls are from 4 to 5 feet thick. The cost of constructing such a kiln during the period from 1910 to 1913 was approximately $3,500 to $4,000. In 1913 the taxpayer had 12 or 13 kilns in operation. The cost of constructing the first three kilns, buildings, tunnels, etc., prior to the date of starting operations ivas capitalized. For the next two or three years the charge for constructing kilns was carried as an operating expense and at the close of each year a determination was made of the cost of improvements and the amount thereof segregated from the operating expenses and carried on the taxpayer’s books .of account as “ development account ” and “ turnover.”
    ‘ In 1913 the taxpayer employed a new manager, who from that time has had full direction of the operations of the company and of the bookkeeping. The cost of new construction since 1913 has been properly capitalized. In 1915 a certified public accountant, who was making an audit of the taxpayer’s books of account, suggested that, since the taxpayer had a large surplus, it would be only good accounting to charge off the balance in the development account, $16,360.32, and the balance in the turnover account, $17,-739.45, to surplus. Inasmuch as the taxpayer was not contemplating the sale of any capital stock or the flotation of any bonds, the manager told him to make entries accordingly. Surplus was then reduced in the aggregate amount of $34,099.77.
    In its income-tax return for the fiscal year ended January 31, 1920, the taxpayer claimed an invested capital of $192,308.82. The Commissioner determined the invested capital to be $119,646.18. In making such determination he excluded from invested capital a so-called development fund shown on the taxpayer’s return in the amount of $34,099.77.
   OPINION.

Smith:

The taxpayer claims the right to increase its invested capital for the fiscal year ended January 31, 1920, in the amount of $34,099.77, that amount representing a reduction made in the surplus of the company in 1915 as a result of charging off certain balances in a “development” account and a “turnover” account.

We are satisfied from the evidence that the amount charged off to the surplus account in 1915 should be restored as of that. date. It appears, however, that the improvements acquired by the expenditure of $34,099.77 were subject to depreciation, which depreciation would not be taken into account in the computation of invested capital for the taxable year if the entire amount of $34,099.77 wore added to tlie invested capital determined for the fiscal year. The depreciated cost of the improvements represented by the $34,099.77 in question should be added to the invested capital for the taxable year under review in the redetermination of the correct amount of the deficiency. Appeal of Goodell-Pratt Co., 3 B. T. A. 30.

Order of redetermination will be entered on 15 days’ notice, under Rule 50.


author: MaRQuette:

text:
    Appeal of FIRSCHING KNITTING MILLS, INC.
    Docket No. 4661.
    Decided July 22, 1926.

      Hold, that the amount of certain notes payable involved herein should not be included in the taxpayer’s invested capital.

      William N. Tulloeh, G. P. A., for the petitioner.

      Ellis W. Manning, Esq., for the Commissioner.
    Before Marquette and Green.
    This appeal is from the determination of a deficiency in income and profits tax for the fiscal year ended March 31, 1920, in the amount of $7,166.98, of which so much is in controversy as arises from the addition by the Commissioner of the amount of $16,344 to the taxpayer’s closing inventory for the year involved and the reduction of its invested capital by the amount of $74,500.
    FINDINGS OE FACT.
    The taxpayer is a New York corporation with its principal office and place of business at Utica, N. Y., and is engaged in manufacturing knitted textile products. It was organized in the year 1918, with an authorized capital stock of $100,000, to take over the business conducted by one J. A. Firsching, the net worth of which at that time was $57,401.72. Firsching turned over his business to the corporation and also paid to it $2,598.28 in cash, and received therefor stock of the corporation of the par value of $60,000.
    At the time the corporation took over Firsching’s business there were outstanding $74,500 of notes payable to certain banks which were endorsed by Firsching and secured by assets owned by him other than those turned over to the corporation. These notes were assumed by the corporation and the amount thereof included in its invested capital as paid-in surplus. During the fiscal year ended March 31, 1920, the corporation paid interest on these .notes in the amount of $3,454.08, but did not claim the amount so paid as a deduction from gross income.

      Upon audit of the taxpayer’s income and profits-tax return for the fiscal year ended March 31, 1920, the Commissioner excluded from invested capital the amount of $74,500 represented by the notes referred to, and allowed the interest paid thereon as a deduction from gross income. The Commissioner also increased the taxpayer’s closing inventory by the amount of $16,344. At the hearing, the Commissioner, however, admitted that he was in error in increasing the taxpayer’s closing inventory and that the inventory as taken by the taxpayer is correct.
   OPINION.

MaRQuette:

The Commissioner has conceded that the taxpayer’s closing inventory as used by it in making its return of income for the fiscal year ended March 31, 1920, is correct; that he was in error in increasing the inventory by the amount of $16,344, and that the taxpayer’s income should be adjusted accordingly. This leaves for consideration only the question as to whether or not the taxpayer is entitled to include in its invested capital, for the year involved herein, the amount of $74,500, represented by notes payable by Firsching to certain banks, which the taxpayer assumed when it took over Firsch-ing’s business. No evidence was presented relative to this issue, except a report of an examination made by a revenue agent, which was admitted by agreement of counsel. The only facts before the Board concerning the amount of $74,500 which the taxpayer seeks to include in invested capital are those admitted by the pleadings and contained in the report of the revenue agent. While these facts are rather meager, they are, however, sufficient, we think, to show that the corporation, when it took over Firsching’s business, acquired all of the assets and assumed the liabilities thereof, and issued stock to him of a par value equal to the net worth of the business. The notes involved herein were assumed by the taxpayer, together with the other liabilities of the business, and became its obligations regardless of the fact that they were endorsed and secured by Firsching. They represented borrowed capital and could no more be properly included in the taxpayer’s invested capital than any other notes or accounts payable. We are of the opinion that the Commissioner’s action in excluding from the taxpayer’s invested capital the amount represented by these notes was proper.

Order of redetermination will be entered on 15 days’ notice, under Bule 50,


author: Geeen

text:
    Appeal of FIRST NATIONAL BANK OF KULM.
    Docket No. 4050.
    Decided July 22, 1926.
    Where a taxpayer, reporting income on the basis of cash receipts and disbursements, enters into an agreement by the terms of which the actual payment to it of interest is deferred to the succeeding taxable year, held, that the interest so paid is income to it in the year in which received.

      Jesse I. Miller, Esq., for the petitioner.

      Lee I. Park, Esq., for the Commissioner.
    Before Steenhagen, Lansdon, Love, and Gjreen.
    The Commissioner has determined a deficiency in income and profits tax for the year 1921 in the sum of $812.73. The error alleged in the petition is “that the Commissioner has included in the taxpayer’s net income for the year 1921 an amount of income representing interest on loans, which is in law and fact income for the year 1920.”
    FINDINGS OF FACT.
    The taxpayer is a national bank, organized under the laws of the United States, with its principal place of business in Kulm, N. Dak. It was during the year 1920 conducting a general banking business. Sometime in November of that year it entered into an agreement with the La Moure County Bank for the consolidation of the two banks, which was to become effective January 3,1921. The taxpayer bank had outstanding certain loans, which matured subsequent to the making of the agreement above referred to and prior to the effective date of the consolidation. As to these loans, it was agreed between the parties to the consolidation that, in so far as it was possible, such loans would not be renewed by the taxpayer bank but would be continued in their then condition until after the consolidation, it being the thought of both that such an arrangement would be to the advantage of the consolidated banks. The parties have stipulated that interest on such loans in the sum of $4,898.58 accrued during that period and would have been paid in the year 1920 except for the agreement and arrangement above referred to. It was provided in the consolidation agreement that this interest, when collected for the taxpayer, should be paid to its stockholders.
    The taxpayer has at all times filed its income-tax return and, except as hereinafter noted, kept its books upon the basis of cash receipts and disbursements. On December 31,1918, in accordance with the regulations of the Comptroller of ¡Currency, the taxpayer altered its system of accounting and thereafter accrued daily the interest on notes, bonds, warrants and other securities. The interest collections on each day were deducted from this amount and the balance remaining was credited to an account wherein was set out the earned but uncollected interest, and at the same time an appropriate entry was made in the daily statement book on both the liability and asset side of the account. Except for the accrual of interest, there was no change in the method of accounting.
    When the interest thus accrued was actually paid to the consolidated bank, the amount thereof was credited to the accounts of the stockholders of the taxpayer. The interest thus collected at all times remained the property of such stockholders and they merely used the consolidated bank as an instrumentality for the collection thereof.
    The income-tax return for the year 1920, as filed by the taxpayer, showed a net loss. In its return for 1921 it sought to deduct the net loss alleged to have been sustained in 1920. The Commissioner refused to permit the deduction and determined a deficiency. The taxpayer now contends that the interest which it accrued on its books in 1920, the payment of which was deferred by the agreement above referred to, and which it reported as income for 1921, was not income to it in that year and that it should have been reported and treated as income for the year 1920.
   OPINION.

Geeen

: Section 212(b) of the Revenue Act of 1918 reads as follows:

(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; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 200 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year.

In the Appeal of Chatham & Phenix National Bank, 1 B. T. A. 460, we said:

In income taxation there are two recognized methods of accounting employed to reflect income; one called the cash receipts and disbursement basis in which income is reported when either actually or constructively received, and the other known as the accrual basis, in which income is reported when due, in the sense of owing, although it may be payable in the future.

In the Appeal of The Bank of Hartsville, 1 B. T. A. 920, it is said:

We held in Appeal of Chatham & Phoenix National Bank, 1 B. T. A. 460, that, where the books of account of a taxpayer are kept on the basis of cash receipts and disbursements, discount on time loans not received within the taxable year does not constitute income for that year. If the Commissioner was correct in holding that this taxpayer kept its books of account on a cash basis, the determination of the deficiency is incorrect.

We Rave found as a fact that this taxpayer kept its books upon the basis of cash receipts and disbursements, and this is true even though, pursuant to the regulations of the Comptroller of the Currency, the unearned interest was accrued, since, so far as the evidence discloses, no other items were accrued. There is no difference between “ discount on time loans not received within the taxable year ” and interest not received within the taxable year. The rule announced in the Bank of Hartsville appeal, supra, is controlling. The taxpayer, being upon the basis of cash receipts and disbursements, properly returned its income on that basis, and, having so properly returned its income, should not be permitted now to change its method of reporting income to an accrual basis.

There is nothing in the evidence to indicate that there was in 1920 a constructive receipt of the interest, the payment of which was deferred by agreement. The stipulation is that this interest “ would have been paid,” but in the deposition the word used is “ collected.” It is apparent that counsel, when they stipulated, did not intend their language to be determinative of any question of constructive receipt. This case is not within the rule laid down in the Appeal of Clarence Schock, 1 B. T. A. 528. In that case the partners were on the accrual basis and actually had the funds within their control. Here the bank is on the cash basis and the interest was uncollected, and it was contemplated that a portion of it would not be collected but would be added to the principal of the renewal notes

Judgment for the Commissioner.


text:
    Appeal of SCHINDLER, INC.
    Docket No. 5856.
    Decided July 22, 1926.
    On the evidence, KeVL, that the taxpayer was not a personal service corporation.

      David L. TJUman, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner.
    Before Geaupnee and Teammell.
    This is an appeal from the determination of a deficiency in income and profits taxes for 1920 and 1921, in amounts of $1,461.73 and $141.08, respectively. The deficiencies arise from the denial by the Commissioner of personal service corporation classification to the taxpayer.

       This decision was prepared during Mr. Graupner’s term oí office.

   FINDINGS OF FACT.

The taxpayer is a New York corporation with its principal office in the City of New York. Its name prior to 1920 was Schindler National Detective Agency, which name was subsequently changed to Schindler, Inc. It was incorporated in 1912, taking over the business previously operated by Raymond C. Schindler, who became its president and continued as such until after expiration of the period involved in this appeal. Associated with him in the conduct of the business were his father, John F. Schindler, and his brother, Walter S. Schindler.

The authorized capital stock of the company was $30,000, consisting of 300 shares of the par value of $100 each. Of this amount, on January 1, 1920, 140 shares were outstanding as follows:

Shares

Raymond O. Schindler, president_ 72

Jolm B\ Schindler_ 10

Walter S. Schindler_ 35

Raymond Schindler, trustee for Raymond Schindler, jr_ 5

James R. Gooding_ 11

William M. Adams_ 2

Nellie Schindler_ 5

Of the above outstanding shares, 25 were issued for the good will of the business formerly conducted by Raymond C. Schindler, which was taken over by the corporation, and 25 shares were issued to the said Raymond C. Schindler pursuant to a resolution of the corporation on November 14,1916, for services performed for the corporation. The other 90 shares represented cash capital of the corporation.

The only change in the stock holdings during the years 1920 and 1921 was the transfer by John F. Schindler of 9 shares held by him to his wife.

During the taxable years in question, Raymond C. Schindler and John F. Schindler devoted their entire time to the active conduct of the taxpayer’s business. William M. Adams was bookkeeper of the corporation and devoted his entire time to the active conduct of its affairs. Nellie Schindler was the wife of Raymond O. Schindler and she, as well as Raymond Schindler, jr., his son, and Gooding were not actively connected with the conduct of the business.

The business of the taxpayer was that of conducting investigations for a selected list of clients, among whom were included many of the leading law firms of New York City. Some of the services rendered consisted in frustrating attempts at blackmail, in tracing lost persons, in secretly obtaining information for clients, and similar work, necessitating a great amount of skill and discretion. The success of tlie business depended upon the confidence of the clients in the personal ability and integrity of the members of the Schindler family who actively carried on or supervised the operations intrusted to the corporation. On some occasions the taxpayer assisted the district attorney, and at times carried on investigations for foreign governments. During the years in question the taxpayer did no advertising and no canvassing. Its clients were obtained entirely through personal contacts established by the Schindler family and by the recommendation of other clients.

During the entire period the taxpayer was engaged in business, there was no service performed which was not personally planned and supervised, if not actually done, by either the father or his sons. In some cases the actual investigation was performed by them. In other cases the investigation was carried on in part by operatives employed by them under their supervision. Only one operative was constantly on the pay roll. Other operatives were employed on a per diem basis, at rates of six to fifteen dollars a day and expenses. These operatives performed the task of “shadowing,” that is, of keeping the person as to whose movements information was desired under close observation. The average number of operatives employed by the taxpayer was about six or seven, though at times it ran as high as twenty.

The assets and liabilities of the taxpayer for the years 1920 and 1921 were as follows:

Cash.. Accounts receivable— Loans receivable.. Liberty Loan bonds... Briggs stock.. Furniture and fixtures Stationery. Equipment.. Deferred charges.. Total.. Notes payable. Accounts payable_ Reservo for bad debts. Capital. Surplus__ Total_ Jan. 1,1920. Dec. 31,1920. Dec. 31,192L ASSETS $1,286.64 19,346. 08 2,322.81 1, COO. 00 2,156. 68 385.16 1,824.15 28,922.02 $1,964.50 29,713.05 3,670.89 1,642.80 2,415.91 773.37 1,913.29 42,093.81 $1,320.27 23,096.26 3.403.92 1,642.80 440.00 2,259.62 246, 76 292.92 2.498.93 35,200.58 LIABILITIES 1,350.00 2,026. 30 1,416.95 14,000.00 10,128. 77 8,900.00 6,244.72 1,800.00 14,000.00 11,149. 09 4,400.00 5,059. 68 2,000.00 14,000.00 9,740.90 28,922.02 42,093.81 35,200.58

During the year 1920, the gross income of the taxpayer was $188,-141.83, and during 1921, $167,898.43. The expenses and salaries of operatives in 1920 were $127,414.26, and in 1921 $114,268.81. These figures include traveling expenses in this country and Europe, maintenance of operatives in the field, and their salaries and bonuses. None of the operatives were stockholders. During 1920 the taxpayer paid out $5,375.80, as commissions, to two persons who were employed to canvass laAvyers and others for business, and for 1921, for the same purpose, the taxpayer paid out $6,301 as commissions on business brought in.

During the years involved in this appeal, Walter S. Schindler, Avho owned 35 shares of stock, was in bad health and traveled to some extent. He visited in Atlanta, Ga., and secured a position there. The taxpayer continued to pay him his salary and expense money.

The greater part of the Avork was done for clients of long standing. To these clients the taxpayer did not send any statement of amounts expended or services rendered until the work Avas completed. Large sums of money were expended for traAreling expenses and, in order to meet these current expenses, the taxpayer made, short-time loans from the bank, some of which were only for a period of a few days.

On December 15, 1919, the directors of the taxpayer passed the following resolution:

In consideration of the increased value of services of the officers of the corporation, we hereby authorize the increase of salaries as follows: R. 0. Schindler from $6,000.00 to $0,000.00 and expense allowance of $250.00 per month; J. I<\ Schindler from $1,800.00 to $4,000.00, with expense allowance of $75.00 per month; W. S. Schindler from $2,400.00 to $5,000.00 with expense allowance of $100.00 per month. This increase to take effect as of January 1, 1919.

The total compensation provided for each officer by the above resolution Avas handled uniformly on the books as one salary account, and was checked out as such. Both the father and the tAvo sons were very active socially; belonged to a number of clubs, and entertained extensively. This activity Avas for the purpose of establishing personal contacts by reason of which clients for the taxpayer might be obtained.

Judgment for the Commissioner.


author: Maequette:

text:
    Appeal of ESTATE OF E. T. EARL.
    Docket No. 4689.
    Decided July 22, 1926.
    The Federal estate tax imposed by the Revenue Act of 1916 accrued one year after the death of the decedent; and where the accounts of an estate were kept ou the accrual basis, the estate tax was a proper deduction from the gross income of the estate for the year in which it accrued, notwithstanding the fact that the Commissioner extended the time for payment.

      1William M. Williams, Esq., for the petitioner.

      I. C. Mitchell, Esq., for the Commissioner.

      Before MaRQIjette and Güeen.
    This appeal is from the determination of deficiencies in income taxes for the calendar years 1921 and 1922 in the total amount of $46,028.48, of which approximately $36,000 is in controversy. The contested portions of the deficiencies arise from the disallowance as deductions in the respective years of amounts paid in those years on account of Federal estate taxes.
    FINDINGS OP PACT.
    E. T. Earl died on January 2, 1919, leaving an estate which consisted of a newspaper called “ The Express,” cash, real estate, stocks and bonds. The executrix operated the newspaper until September 30, 1919, when it was transferred to a corporation in exchange for its stock. The books of the newspaper during the operation thereof by the executrix were kept on the accrual basis.
    The executrix kept other books for the estate, and during the years 1919, 1920 and 1921 all items which by their nature were accruable were accrued theron, except the liability for the Federal estate tax. The books show payment of the estate tax in the years and in amounts as follows:
    1920_$75,819.88
    1921_ 105, 000. 00
    1922_ 90, 559.64
    The executrix found that the income from the estate for the year 1920, after making provision for current expenses, would be insufficient to pay the estate tax when it became due in 1920, and application was made to the Commissioner for an extension of the time within which to pay same. This extension was granted and the installments of 1921 and 1922 were paid in conformity therewith.
    The Commissioner accrued the liability for the estate tax in the year 1920, and disallowed as deductions in the years 1921 and 1922 the amounts paid thereon in those years.
   OPINION.

Maequette:

The Revenue Act of 1918 imposed a tax on the net income received by the estates of deceased j>ersons during the period of administration or settlement and provided that, in ascertaining the net income, there shall be deducted “ taxes paid or accrued within the taxable year (a) irmposed by authority of the United States, except income, war-profits and excess-profits taxes.” That the tax involved herein is deductible under the provisions of laAv just quoted is well settled and is conceded by the parties to this appeal. The Commissioner, however, contends that the entire amount of the tax should be deducted from the gross income of the estate for the year 1920, while the taxpayer contends that the several payments should be deducted in the years in which they were made.

The record discloses that Earl died on January 2, 1919; that the books of his estate were kept on the accrual basis; that a part of the estate tax was paid in the year 1920, and that an extension of time for the payment thereof having been granted by the Commissioner, the remainder of the tax was paid in the years 1921 and 1922.

The case of United States v. Mitchell, 271 U. S. 9, is, in our opinion, strikingly in point here. The facts in that case were that Dollora R. Gates died intestate on November 28, 1918, leaving a large estate. The Federal estate tax accrued one year after her death. On November 26, 1919, the executors of her estate made a return showing $2,927,762.64 due the United States under the Revenue Act of 1916. They did not pay any part of the tax in 1919, but paid $1,000,000 on February 25, 1920, and the balance on May 27 of that year. The accounts of the estate were kept on the cash receipts and disbursements basis.

On March 14, 1920, the executors made an income-tax return for the estate for the year 1919, under the Revenue Act of 1918, showing tax due in the amount of $905,225.73. If the estate tax had been deducted there would have been no taxable income for that year. However, when the return was made, the rulings and regulations of the Commissioner of Internal Revenue and the Secretary of the Treasury did not permit the deduction of the Federal estate tax; and for that reason the executors did not claim that it should be deducted, but paid the amount shown by the return. After the decision of the Supreme Court of the United States in the case of United States v. Woodward, 256 U. S. 632, the executors filed a claim for refund, which was denied. The Bureau of Internal Revenue offered to allow them to deduct the estate tax paid in 1920 from gross income of the estate for that year. The executors refused to accept the offer and brought action in the Court of Claims to recover the full amount of the 1919 income tax paid. The Court of Claims held the estate tax deductible in computing the net income of the estate for the year 1919, and gave judgment for the full amount claimed by the executors. The Supreme Court of the United States, reversing the judgment of the Court of Claims and holding the estate tax involved therein deductible from the gross income of the estate for the year in which paid, said:

It is established that, in calculating the income tax on an estate during administration under the Revenue Act of 1918, § 214 (a) (3), federal estate taxes are deductible. United States v. Woodward, supra. But the question presented by this ease is whether in calculating the income tax for 1919, the executors were entitled to deduct from the gross income actually received in that year the estate tax which was not paid until 1920. The executors maintain that under § 214 (a) (3) estate taxes are deductible if paid or if accrued within the taxable year; and that the estate tax, accruing in 1919 and paid in 1920, was deductible from gross income actually received in 1919. When regard is had to other provisions of the Act it is clear that this contention is not admissible. Section 200 declares that “ paid ” means “ paid or accrued,” and that the phrase “ paid or accrued ” shall be construed according to the method of accounting upon the basis on which the net income is computed under § 212. And § 212 provides that net income shall be computed on the basis of the taxpayer’s annual accounting period in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. (United States v. Anderson, 269 U. S. 422) ; but if no such method has been enrployed, or if the method employed does not reflect the income, the computation shall be made upon a basis and in a manner that, in the opinion of the Commissioner, does clearly reflect the income. The return shows that it was made on the basis of income actually received in 1919. This indicates that the accounts were kept on the basis of actual receipts and disbursements, and there is nothing in the record to show that any other method was employed. The burden is on the executors to establish the invalidity of the tax. United States v. Anderson, supra. They have not shown that their books were kept on the accrual basis. Assuming, as we must, that the accounts of the estate were kept on the basis of actual receipts and disbursements, the executors were required to make return on that basis. Notwithstanding the option given taxpayers, it is the purpose of the Act to require returns that clearly reflect taxable income. That purpose will not be accomplished unless income received and deductible disbursements made are treated consistently. It was not the purpose of the Act to permit gross income actually received to be diminished by taxes or other deductible items disbursed in a later year, even if accrued in the taxable year. It is a reasonable construction of the law that the same method be applied to both sides of the account.
Appellees contend that United States v. Woodward, supra, governs this case. The provisions of the Revenue Act of 1916 and the Revenue Act of 1918 which are here involved were considered in that case. The cases are much alike. Woodward died December 15, 1917, and the estate tax became due one year later, but it was not paid until February 8, 1919. It may be assumed that the return for 1918 included only the income actually received in that year.
The rules and regulations then in force did not permit the deduction of the estate tax. If that deduction had been made there would have been no taxable income. The executors paid the tax under duress, and brought suit for the amount paid. The Court of Claims held them entitled to recover, and this court affirmed the judgment. The question considered and decided was whether in ascertaining net taxable income the estate tax was deductible. The opinion referred to the provision which imposes the tax upon incomes of estates and that part of § 214 which authorizes the deduction of “ taxes paid or accrued within the taxable year imposed (a) by the authority of the United States, except income, war-profits and excess-profits taxes,” and, in discussing the clause defining the deductions permitted to be made, the court said (p. 634), “ The words of its major clause are comprehensive and include every tax which is charged against the estate by the authority of the United States. The excepting clause specifically enumerates what is to be excepted. The implication from the latter is that the taxes which it enumerates would be within the major clause were they not expressly excepted, and also that there was no purpose to except any others. Estate taxes were as well known at the time the provision was framed as the ones particularly cxceptoil. * * * Thus their ■omission from the excepting clause means that Congress did not intend to except them. The Act of 1910 calls the estate tax a ‘ tax ’ and particularly denominates it an ‘ estate tax.’ This court recently has recognized that it is a duty or excise and is imposed in the exertion of the taxing power of the United States. New York Trust Co. v. Eisner, ante, 345.” The question decided concerned the character of the exaction; that is, whether the so-called federal “ estate taxes ” were “ taxes ” within the meaning of that word as used in the clause of § 214 quoted. The government did not contend that, if deductible at all, the estate taxes could not be deducted in that case because the return was made on the basis of income actually received in 1918, whereas the estaio tax, accruing in that year, was not paid until 1919. That question was not presented to the court for decision, and no such question was considered or decided. It is not to be thought that a question not raised by counsel or discussed in the opinion of the court has been decided merely because it existed in the record and might have been raised and considered. Webster v. Fall, 266 U. S. 507, 511. The Woodimrd case does not support the contention that, where the estate income tax return is made on the basis of income actually received in the taxable year, there may be deducted the estate tax accruing in that year but paid in the following year.

The estate tax herein was imposed by the Revenue Act of 1916, the decedent having died while that Act was still in force, but the assessment and collection thereof were made under the estate-tax provision of the Revenue Act of 1918 (section 1400 of the Revenue Act of 1918). The Revenue Act of 1916 provided that the estate tax imposed by that Act, “ shall be due one year after decedent’s death ”. The same provision is contained in the Revenue Act of 1918. The tax under the 1916 Act accrued when it became due, United States v. Woodward, 256 U. S. 632; and United States v. Mitchell, supra; and it seems clear that the tax under the 1918 Act also accrued when it became due, that is, one year after the death of the decedent.

The books of the taxpayer estate herein were kept on the accrual basis and we are of the opinion, in view of the decision of the Supreme Court of the United States, in United States v. Mitchell, supra, that the estate tax in question constituted a proper deduction from the income of the estate for the year in which it accrued, that is, in the year 1920, unless, as the taxpayer contends, the action of the Commissioner extending the time for payment, operated to change the date when the tax became due.

The extension of time within which to pay the tax involved herein was granted to the taxpayer estate by the Commissioner under the authority found in section 406 of the Revenue Act of 1918, which provides:

That the tax shall be due one year after tie decedent’s death; but in any case where the Commissioner finds that payment of the tax within one year after the decedent’s death would impose undue hardship upon the estate, he may grant an extension of time for the payment of the tax for a period of not to exceed three years from the duo date. If the tax is not paid within one year and 180 days after decedent’s death, interest at the rate of 6 per centum per annum from the expiration of one year after the decedent's death shall be added as part of the tax.

Section 408 of the Revenue Act of 1918 provides that if the estate tax is not paid within 180 days after it is due “ the collector shall, unless there is reasonable cause for further delay, proceed to collect the tax under the provisions of general law, or commence appropriate proceedings in any court in the United States, in the name of the United States, to subject the property of the decedent to be sold under the judgment or decree of the court ”; and under the provisions of section 406, supra, interest from the due date is added as part of the tax. Section 204 of the Revenue Act of 1916, which was involved in the case of United States v. Mitchell, supra, provided that, if the tax was not paid within 90 days after it became due, interest from the time of the decedent’s death should be added as part of the tax.

Under the foregoing provisions of law, estates were, for all practical purposes, granted extensions of time within which to pay the estate tax of 90 and 180 days, respectively, after the date the tax became due. These extensions were of the same character and effect as the additional extension granted to the taxpayer herein, except that the additional extension did not relieve the estate from the payment of interest on the tax. In granting the additional extension, the Commissioner did not and could not change the due date of the tax, which date was fixed by law, but he merely stayed the hand of the collector.

For the reasons herein stated, the action of the Commissioner must be approved.

The deficiency is $4-6,02848- Order will he entered accordingly.


text:
    Appeal of S. B. SMYTHE CO.
    Docket No. 3778.
    Decided July 23, 1926.
    The evidence does not show that the taxpayer ascertained, during the year 1920, a debt in the amount oí 860,353.02 to have been worthless.

      A. M. Oliver, Esq., for the petitioner.

      Bruce A. Tow, Esq., for the Commissioner.
    Before Smith, Littleton, and Trussell.
    This is an appeal from the determination of a deficiency in income and profits tax for the year 1920 in the amount of $20,719.79, arising from the disallowance of a deduction taken for a bad debt in the amount of $60,353.02.
    BINDINGS OB BACT.
    The taxpayer is a West Virginia corporation with its principal office and place of business at Pittsburgh, Pa. It is engaged in the construction engineering business. It entered into an agreement with the International Steel Tube Co., of Cleveland, Ohio, in January, 1920, according to the terms of which it was to construct two furnaces for that company at a price of $105,000, payable on a monthly estimate basis of 90 per cent of the amount of labor and material on the job.
    The taxpayer commenced work under the contract early in 1920 and substantially completed the contract prior to the close of the year. It charged on its books of account against the company the sum of $94,500, which was 90 per cent of the total amount due under the contract. The balance, $10,500, was never charged on the books of the taxpayer, for the reason that within 30 days after the contract was completed the taxpayer considered the account worthless.
    The monthly estimates on account of work done and material furnished, which fell due on July 31, August 31, and September 30, 1920, were paid by the debtor company, the last payment on account of which was made on October 30, 1920. The balance of the estimates for the work done and material furnished, amounting to $60,353.02, was not paid in accordance with the terms of the contract.
    The taxpayer discovered in November, 1920, at which time it attempted to put a mechanics’ lien upon the furnaces, that the ground upon which the furnaces were erected was not owned by the debtor company but that it was held by it under a lease.
    Subsequent to December 31, 1920, and between January 6 and February 19, 1921, the taxpayer paid $2,418.83 on account of labor and material furnished upon the contract. Of this total, $2,206.75 was for labor and $272.08 for material. These amounts represented the cost of services performed in cleaning up and the cost'of certain castings for replacement.
    .The minutes of a regular meeting of the board of directors of the taxpayer, held January 26, 1921, provide:
    No statement in detail as to the financial condition of the company can be made at this time, by reason of the audit to be made by Ernst and Ernst not as yet being completed.
    The minutes of a special meeting of the board of directors, held February 10, 1921, read in part as follows:
    The object of this meeting was for the purpose of determining the status and condition of a contract with the International Steel Tube Company, Cleveland, Ohio, Contract No. 8200, and after full discussion, it was determined that the balance due from said company should not be considered as Income or Profits for the calendar year ended December 31, 1920. After due consideration and discussion of the matter, the following Resolutions were presented and unanimously adopted by an affirmative vote of all the Directors present of the company.
    Whereas, It Was Further Resolved, that the amount of $60,353.02, the balance shown on the books due from the International Steel Tube Company of Cleveland, Ohio, Contract No. 8200, shall not be considered as Income or Profits when filing statement as to the United States Government for Taxes for Revenue purposes, owing to the fact that the financial standing and ability to pay by said International Steel Tube Company is doubtful and impossible and is therefore a bad debt and total loss as of December 31, 1920, hence the reason why this amount was not included as income in accordance with statement rendered to the United States Internal Revenue Department.
    It Was Further Resolved, that should any recovery of payment be made by the International Steel Tube Company during the calendar year ending December 31, 1921 or at any other period, that said amounts recovered or payments made by said company in liquidation of the debt shall be so reported to the United States Internal Revenue Department as Income and Profit derived during the calendar year, which ended December 31,1920, and which was reported during said year as a total loss and uncollectible debt.
    The certified public accountants who made an audit of the taxpayer’s books for 1920, in January, February, or March, 1921, reported the account against the International Steel Tube Co. as an ■ account receivable. In their audit they state:
    .In accordance with instructions received, we do not correspond with companies customers for the purpose of verifying the accuracy of book records pertaining to their accounts.
    No provision has been made on the books of the company in the preparation of this report for shrinkage in the value of this asset due to items doubtful of collection, etc.
    The books of account of the taxpayer show the account against the International Steel Tube Co., in the amount of $60,353.02, as charged to profit and loss under date of December 31, 1920.
    In February, 1921, the debtor company advised the taxpayer that it anticipated a possibility of interesting further capital and gave the taxpayer its notes in a total amount of $25,000, on account of which there was paid the sum of $11,500 on various dates during the years 1921 and 1922. The balance of the said amount due the taxpayer vvas never paid and in 1923 the debtor company was adjudged a bankrupt and the taxpayer never recovered anything on account of the debt.
   OPINION.

Smith:

The Revenue Act of 1918 permits a corporation to deduct from gross income in its tax return “ debts ascertained to be worthless and charged oil within the taxable year.” In the instant appeal the taxpayer contends that the debt owed to it by the International Steel Tube Co., in the amount of $60,353.02, was ascertained to be worthless during that year and was charged off within the taxable year. We are satisfied from the evidence of record that the debt was not ascertained to be worthless and was not charged off the books of account within the year 1920. The taxpayer took corporate action in 1921 and determined the debt to be worthless at that time. Although the debtor was financially embarrassed at the close of 1920, together with a great many other corporations, it apparently still had hopes of obtaining financial assistance which would put it on its feet again. Appeal of Alemite Die Casting & Mfg. Co., 1 B. T. A. 548; Appeal of The Murchison National Bank, 1 B. T. A. 617; Appeal of Carl Muller, 4 B. T. A. 169.

Judgment for the Commissioner.