text:
    Stromberg Electric Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3398.
    Promulgated November 3, 1927.
    1. The evidence in this proceeding shows that the assets of the Stromberg Electric Co., a predecessor corporation organized under the laws, of the State of Illinois, were acquired by the petitioner in exchange for petitioner’s stock.
    2. The amount that petitioner may include in its invested capital on account of intangibles acquired in exchange for stock determined.

      James W. Good, Esq., and Valentine Hechler, Esq., for the petitioner.

      Geo. G. Witter, Esq., for the respondent.
    This proceeding is for the redetermination of income and profits tax for the calendar years 1918, 1919, and 1920. The Commissioner asserts that for 1918 there was an overassessment of $14,485.55; that for 1919 there was an overassessment of $5,529.49; and that for 1920 there is- a deficiency of $25,753.90. The petitioner alleges that the Commissioner erred in that he failed to include in invested capital any amount on account of intangibles.
    FINDINGS OP FACT.
    The petitioner is a Maine corporation with its principal office and chief place of business in Chicago, Ill. It was organized December 29, 1913, and within a few days thereafter it acquired a business which previously had been conducted by various corporate antecedents, the Stromberg Electric Co., organized under the laws of Illinois on May 1, 1910, being its immediate predecessor. The business was originally organized in 1903 to develop a portable time-recording stamp embodying a clock-driven mechanism which had been invented by a man named Purdy. This stamp was still being manufactured at the end of 1913, but only to a very limited extent. Many difficulties were experienced in perfecting the clock-driven mechanism, the principal defect being its lack of ruggedness. This factor, coupled with its limited field of usefulness, led to the ultimate withdrawal of the device from the market. Also in 1903 a competitor had placed on the market an electrically driven time recorder.
    The mechanism of the competing recorder had certain inherent defects which, in a great many instances, caused an inaccurate re-cordation of time. In 1905 a man named Crook, an employee of the Perry Time Stamp Co., which was the originator of petitioner’s business, invented an electrically driven time-recording mechanism which, to a large extent, corrected the faults existing in the competing device. The first recorders employing the mechanism invented by Crook were manufactured in 1906. These devices were placed with friendly manufacturers who would give them a fair trial. An application for a patent covering the mechanism was filed in 1907. Due to faults which developed in the recorders it was not until 1908 that a stable product was developed and in that year the application filed in 1907 was abandoned and a reapplication was filed. The application filed in 1908 embodied the basic principle of an electrically driven geared train. Nearly all of the claims set forth in the application had been allowed prior to 1914 and the patent was issued June 15, 1915.
    The electrically driven mechanism developed for use in the portable electric time stamp was also utilized in the manufacture of a stationary time recorder which was devised to record the time at which employees arrived and departed from work and also to record the amount of time spent by workmen upon various jobs. This device was known as an in-and-out recorder and opened up a sales field much larger in scope than the one available to the portable recorder. The development of the in-and-out recorder was started in 1909, at which time two other companies were manufacturing a similar device. The mechanisms employed in the competing devices were not as satisfactory as the one invented by Crook and the introduction of in-and-out recorders containing the latter mechanism eventually eliminated the competing recorders. Application for a patent on the in-and-out recorder was filed May 13, 1910, nearly all of the claims had been allowed prior to 1914, and the patent was issued June 15, 1915. This was the basic patent on that type of recorder.
    From 1903 to 1910 comparatively few products were manufactured and sold, the petitioner’s predecessor being engaged almost wholly in developing the type of recording devices now manufactured by the petitioner. These devices include, in addition to the portable time stamp and the in-and-out recorder, an automatic time-signaling device and an electric system by which any number of time-recording devices for various purposes, as well as clocks for observing time, can be controlled by one master clock. This latter system results in the maintenance of uniform time throughout an establishment, all devices registering the same time at all times.
    From 1910 to 1913 the activities of the business were divided between developing machinery to manufacture the mechanically perfected devices and developing a sales field for the manufactured products. At the time the petitioner was organized its predecessor was the owner or assignee of 18 patents and 14 patent applications, the acquisition of which by petitioner gave it complete protection. Competition was steadily decreasing and the petitioner’s predecessor had built up a sales field by selling its devices to over 800 customers, one of whom, the Western Union Telegraph Co., subsequently purchased from petitioner over $450,000 worth of equipment.
    The principal stockholders of the predecessor corporation were Alfred Stromberg and Androv Carlson, who were also its chief executives and financial backers. At the beginning of the year 1913 Stromberg was ill, Carlson had retired from business, and neither was available as a source of further financial or managerial assistance. The other stockholders concluded that the business should be reorganized and negotiations were entered into with William P. Martin, a man of large means and experience in manufacturing enterprises, looking toward his becoming interested in the business.
    The negotiations were carried on in substantial accordance with a proposed scheme of reorganization which was acceptable to all of the stockholders and which stated:
    The parties signing this instrument, or one of its counterparts, have each simultaneously endorsed in blank the certificate or certificates representing their stock holdings and have delivered or caused the same to be delivered to Keene H. Addington, Esq., in escrow to the end that the corporate plan of re-organization hereinafter set forth may be accomplished, said stockholders, and each of them, jointly and severally, hereby authorizing and empowering said escrow holder to do and perform each and every act expedient or necessary to carry into full effect the plans and purposes set forth in this instrument, including specifically the making of the exchange of securities hereinafter provided for.
    Eiest. A new corporation to be formed under the laws of the State of Delaware or such other State as said escrow holder may determine, under the name of Stromberg Electric Company, or such other name as said escrow holder may select, with capital stock issues substantially as follows:
    A non-voting first preferred stock, of the par value of one hundred dollars ($100) per share, in amount equal to the fresh cash which may from time to time be invested in said new corporation.
    A non-voting second preferred stock, of the par value of one hundred dollars ($100) per share, in amount equal to the obligations, principal and interest, represented by said promissory notes held by stockholders hereinbefore referred to, for which said notes said second preferred stock is to be substituted as hereinafter provided.
    A non-voting third preferred stock, of the par value of ten dollars ($10) or one hundred dollars ($100) per share, as said escrow holder, shall determine, in amount aggregating one hundred and twenty-five thousand dollars ($125,000).
    A common stock, of the par value of one hundred dollars ($100) per share, in amount aggregating the sum of one hundred and twenty-five thousand dollars ($125,000).
    The rights and privileges of said several classes of stock to be set forth in certificates all in effect, if not in language, substantially as follows: * * *
    Second. That all of the assets of said Stromberg Electric Company, of Illinois, of every kind, including cash on hand, bills and accounts receivable, merchandise manufactured, partly manufactured and unmanufactured, patents and good will, shall be delivered, transferred, conveyed and assigned to said new corporation; the liabilities of said Stromberg Electric Company of Illinois, to be assumed by said new corporation provided the same are not in excess of the aggregate amounts hereinbefore represented, and provided, further, that the directors of said new corporation consider the same equivalent in money value to the par value of the second preferred stock, the third preferred stock and the common stock issues hereinbefore provided for and will issue said three several stock issues fully paid and nonassessable in exchange therefor. Certificates to be issued to the various parties shown by this instrument to be entitled thereto and in the event of discrepancy between the recitals of this instrument and the certificates or evidences of indebtedness deposited with the escrow holder, the escrow deposit to control.
    Third. Said first preferred stock to be sold from time to time at par for cash, the amounts to be issued from time to time to be determined solely by said new corporation and the right to purchase the same without any obligation so to purchase to inhere in the holders of the common stock; it being the purpose of the re-organization hereby provided for to give to said common stock the full control of said new corporation including the right to liquidate said new corporation for the purpose, among others, of providing for the retirement of said first preferred stock.
    Fourth. Said second preferred stock shall be issued dollar for dollar in liquidation for and in settlement of the promissory notes held by the stockholders aforesaid, which said notes have by the respective owners thereof been delivered to said escrow holder with authority hereby expressly conferred to cancel the same in exchange for said second preferred stock as herein provided.
    Firth. Said third preferred stock after deducting 5 per centum (5%) of the aggregate amount thereof, that is to say, sixty-two hundred and fifty dollars ($6,250) of the par value thereof, to be delivered as and by way of compensation to the law firm of Jones, Addington, Ames, and Seibold for the negotiation of the deal by which this proposition for reorganization may be effected, shall be delivered to the present stockholders of said Stromberg Electric Company, of Illinois, pro-rata according to their respective stock holdings therein, as here-inbefore specially set forth, said holdings to be cancelled concurrently with the exchange provided for.
    Sixth. Said common stock shall be delivered to the person or persons whom said escrow holder shall obtain to finance, manage, and control said new corporation, to be and become the sole and absolute property of such person or persons.
    Seventh. After the organization of said new corporation and the distribution of the stock thereof as hereinbefore provided, said Stromberg Electric Company, of Illinois, shall be dissolved and its charter surrendered.
    Eighth. It is understood that said escrow holder is acting as the attorney for the party or parties who are considering the acceptance of the proposition in this instrument contained; that the stock fee hereinbefore provided to be paid to the firm of said escrow holder is by way of services for promotion; that the legal costs and expenses incurred in connection with the preparation of this instrument and in carrying forward the plans and purposes herein set forth are to be advanced by the party or parties so considering this proposition but Ultimately paid by said new corporation if this proposition is accepted and the plans thereof consummated.
    Ninth. In addition to other salaries which may lawfully be voted, the owners of said common stock, may, notwithstanding their interest, provide for a salary to himself or themselves of six thousand dollars ($6,000) per annum until such time as said third preferred stock shall be placed upon a four per centum basis; after said stock shall have been placed on a four per centum basis, said salary may be increased to the sum of ten thousand dollars ($10,000) per annum.
    Tenth. Acceptance of the proposition by the parties now considering the same shall make this instrument irrevocable by any party or parties in interest.
    The business and the proposed plan of reorganization were considered favorably by Martin and the petitioner was organized as the first step. Thereafter the directors of the Stromberg Electric Co. (Illinois) met on January 9, 1914, the minutes of that meeting reading in part as follows:
    The president then stated that the main object of the meeting was to carry out and conclude a proposition involving the reorganization of the company which had been made by all the stockholders of the company with the exception of Messrs. H. A, Jones, George E. Dixon and H. N. Moseley; that he had personally purchased, for the sum of one hundred dollars ($100), an option on the stock of Mr. H. A. Jones, to be taken up by the payment of the further sum of fifty-nine hundred dollars ($5,900) ; that Mr. George E. Dixon as to ninety-four (94) shares had joined in the proposition referred to but had withheld his consent as to the remaining fifty (50) shares owned by him in the company; that as to such fifty (50) shares he had personally acquired an option to purchase the same for the sum of twenty-five hundred dollars ($2,500) ; that Mr. H. N. Moseley had given his consent to the proposition but that one (1) share of the four (4) held by him had been assigned to a third party who would not give his consent; that he had personally purchased that one (1) share and paid therefor the sum of forty dollars ($40) ; that he had personally assured Mr. William P. Martin, to whom said written proposition of reorganization had been submitted, that he would see to it that the options aforesaid were exercised. The President thereupon proposed that the company purchase with its funds the stock referred to by him and direct that the same when obtained be retired and cancelled. Thereupon a resolution was presented by Mr. Androy Carlson, which on motion by Mr. A. C. Bryan, seconded by Mr. J. C. Bryan, was unanimously adopted, which said resolution was and is in words and figures as follows:
    Resolved that eight thousand five hundred and- forty dollars ($8,540) be appropriated out of the funds of the company and turned over to Mr. Charles M. Crook to reimburse him for expenditures made and to be made in connection with the acquirement of ninty-three (93) shares of the stock of this company standing in the name of H. A. Jones, fifty (50) shares standing in the name of Mr. George E. Dixon and one (1) share standing in the name of H. N. Moseley.
    Be It Further Resolved that the several certificates represented by the stock of H. A. Jones, George E. Dixon and H. N. Moseley respectively, when duly acquired, be canceled.
    The President thereupon further stated that Mr. Martin had caused to be organized a new corporation under the laws of the State of Maine under the name of Stromberg Electbio Company with a total capitalization of four hundred and ninety thousand dollars ($490,000), divided as follows:
    First preferred, two hundred thousand dollars ($200,000) ;
    Second preferred, forty thousand dollars ($40,000) ;
    Third preferred, one hundred and twenty-five thousand dollars ($125,000) ; and
    Common, one hundred and twenty-five thousand dollars ($125,000). that in view of the retirement of the stock to be purchased on behalf of the corporation the amount of third preferred stock which would be issued in the new corporation would be correspondingly reduced; that said new corporation had been organized pursuant to and in conformity with the proposition which had been submitted to, approved and signed by the stockholders of this company and that it would be in order for a resolution to he submitted to the meeting offering to sell the assets, business and good ivill of this company to the n&w corporation which has been so organised. Thereupon a resolution was presented by Mr. Androv Carlson, which on motion by Mr. A. C. Bryan, seconded by Mr. J. C. Bryan, was unanimously adopted, which said resolution was and is In words and figures as follows:
    Resolved that the president of this company offer to sell, assign and transfer to Stromberg Electric Company, a corporation of the State of Maine, all of its assets of every kind, including cash on hand, bills and accounts receivable, merchandise manufactured, partly manufactured and unmanufactured, patents and good will upon condition that said company assume all of the liabilities of this company, except the liabilities provided to be liquidated by the issue of second preferred stock, for and in consideration -of the second preferred, third preferred and common stock provided for in said written proposition, except as the amount of said third preferred is reduced by the retirement of stock purchased by this corporation.
    Resolved Further that if this offer is accepted the president and secretary of this company be, and they are hereby authorized to make, execute, acknowledge and deliver for and in the name and on behalf this company all necessary or proper bills of sale, assignments and transfers essential or expedient to pass the title to the assets, business and good will of this company, including all leases now enjoyed by it and all other interests of any kind or character.
    Resolved Further that if this offer is accepted, that the stock certificates to be issued shall be issued pursuant and in accordance with said written proposition for reorganization and shall be delivered to Keene H. Addington, Esq., as escrow bolder to be distributed pursuant to and in conformity with the terms of said proposition. (Italics ours).
    At a meeting of the directors of the Stromberg Electric Co. (Maine) held on January 9, 1914, the offer was accepted, the minutes of that meeting reading as follows:
    Minutes of a meeting of the directors of Stromberg Electric Company held at Room 1610 — 105 West Monroe Street, Chicago, Illinois, on the ninth day of January, 1914, at two o’clock P. M.
    Present: Granger Earwell, Joseph B. Edwards, Robert Lewis Ames, Walter Hamilton, William Perry Hahn.
    Mr. William Perry Hahn was chosen chairman of the meeting and called the same to order.
    Mr. Walter Hamilton was chosen and acted as Secretary of the meeting.
    Mr. Hahn stated that Mr. Charles M. Crook, President of Stromberg Electric Company, of Illinois, was present and desired to present a written proposition on behalf of said Stromberg Electric Company, of Illinois, and the individual stockholders thereof, which said proposition (a copy of which is hereinafter incorporated in these minutes) was ordered placed on file and preserved among the records of the company.
    Thereupon the meeting proceeded to the discussion of said proposition and a review of the financial, patent and general situation of Stromberg Electric Company, of Illinois, and thereupon after said discussion Mr. Granger Earwell presented and moved the adoption of a resolution, which motion was duly seconded by Mr. Joseph B. Edwards and unanimously carried, which said resolution was and is in words and figures as follows, to-wit:
    Whereas a proposition has been made to this company in writing by Strom-berg Electric Company, of Illinois, which said proposition is in words and figures as follows, to-wit:
    Chicago, January 9, 1914.

    To Stromberg Electric Company, a Maine corporation:
    I have been duly authorized by resolution unanimously adopted by the directors of Stromberg Electric Company, of Illinois, to offer to sell, assign and transfer to your company all of the assets of said Stromberg Electric Company, of Illinois, of every kind, including cash on hand, bills and accounts receivable, merchandise manufactured, partly manufactured, and unmanufactured, patents and good will, upon condition that your company assume all of the liabilities of said Stromberg Electric Company, of Illinois, for and in consideration of the issue of capital stock in your company to the persons and in the amounts named in the respective schedules hereto attached, marked respectively Schedule A, Schedule B and Schedule C. If this offer is accepted I have been authorized and directed to request your company to deliver all stock certificates mentioned and specified in said schedules respectively, to Keene H. Addington, Esq., who has been appointed by the various persons entitled to said stock certificates to receive and distribute the same.
    (Signed) C. M. Crook.
    And Whereas it appears to the satisfaction of the board of directors of this company that the assets, business and good will so offered are of a fair net cash market value in excess of the par value of the stock requested in payment therefore:
    Now, Therefore, Be It Resolved :
    (1) That the proposition of said Stromberg Electric Company, of Illinois, be, and the same is hereby accepted.

      (2) That upon receiving the proper instruments transferring the assets mentioned and referred to in said proposition, the officers of this company shall issue and deliver the stock of this company in the amounts specified in said proposition and to the persons therein designated.
    (3) That the stock subscriptions of the various persons to whom said stock shall be issued shall be deemed and taken as fully paid and non-assessable.
    (4) That this company upon the consummation of the transaction herein provided for shall be deemed to have assumed each and every of the liabilities of said Stromberg Electric Company, of Illinois, so far as the same have been disclosed to this Company.
    And thereupon, on motion -duly made and seconded, the meeting adjourned.
    The petitioner thereupon issued second preferred stock of a total par value of $37,200; third preferred stock of a total par value of $115,500; and common stock of a total par value of $125,000. The escrow holder distributed the second preferred stock to the note holders of the predecessor corporation; the third preferred stock to the stockholders of the predecessor corporation in proportion to their stock holdings therein; and the common stock to the nominee of the predecessor corporation who, in turn, endorsed it to Martin. In return for its second preferred, its third preferred, and its common stock the petitioner received all of the assets of the Stromberg Electric Co. (Illinois) consisting of a mixture of tangibles and intangibles. The intangibles were set up in petitioner’s books on January 16, 1914, at a value of $198,360.41. The books of the predecessor corporation contained two accounts headed development account and patents, showing totals of $90,421.38 and $17,577.86, respectively.
    Sales of first preferred stock — -representing fresh capital — and the total par value of each class of stock outstanding for each of the years 1914 to 1919, inclusive, were as follows:

    All of the first preferred stock was sold at par. The first sale of this class of stock was made on February 6, 1914. It was sold to William P. Martin, as was all of the first preferred stock that was sold in the years 1914,1915, and 1916. Of the $25,500 worth of stock sold in 1918, $20,000 worth was sold to Martin and $5,500 to others. In 1919, $45,000 worth was sold to Martin and $14,600 worth was sold to others.

      The predecessor corporation’s sales and net profits for each of the years of its existence were as follows:

    Petitioner’s sales, invested capital, exclusive of intangibles, and net profit for each of the years 1914 to 1920, inclusive, were:

    Dividends were paid by petitioner on its various classes of stock for the years 1914 to 1920, inclusive, as follows:

    On April 9, 1914, there were recorded in the Patent Office three assignments by the Stromberg Electric Co. (Illinois) to the Strom-berg Electric Co. (Maine) covering all of the former’s interest in the 18 patents and 14 patent applications. Each assignment recited a consideration of $1 and other good and valuable consideration.
   OPINION.

Smith:

The Commissioner having determined an overassessment for each of the years 1918 and 1919, the Board is without jurisdiction of so much of the appeal as pertains thereto. Appeal of R. P. Hazzard Co., 4 B. T. A. 150, and Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The issues raised with respect to the year 1920 are (1) whether petitioner’s original issue of stock was issued in exchange for the stock of its predecessor or whether it was issued in exchange for the assets of its predecesor; and (2) what amount, if any, should be included in petitioner’s invested capital for income-tax purposes as representing the value of intangibles acquired by it upon the reorganization of its predecessor, the Stromberg Electric Co., an Illinois corporation.

The petitioner contends that the reorganization was predicated upon and consummated through an exchange of stock for stock and that there should be included in its invested capital the sum of $198,360.41 as representing the value of intangibles as at the date of the reorganization of its predecessor. The respondent contends that the reorganization was accomplished by means of an exchange of stock for assets and that no amount should be included in petitioner’s invested capital on account of intangibles in the absence of proof of any actual cash value at the time it was paid in for stock.

In support of its contention that the reorganization was effected through an exchange of stock for stock the petitioner relies mainly on the proposed plan of reorganization that was approved by the stockholders of its predecessor as representing the intention of the parties to the reorganization. Counsel for the petitioner argue that the directors of the two corporations acted pursuant to and in accordance with the terms and intent of that plan; that the steps leading up to the organization of petitioner should be considered as well as • the acts whereby the transfer took place; that if such acts are considered as a whole it becomes apparent that the ideas and intentions of all parties to the reorganization were strictly carried out and that the reasoning of the court in United States v. Board, 14 Fed. (2d) 459, is applicable here.

While it would seem that the stockholders of the predecessor corporation had in mind an exchange of the stock then held by them for stock in a new corporation to be organized, it should be borne in mind that the proposed plan of reorganization was accepted by the stockholders prior to the incorporation of the petitioner. It would also seem that as far as the stockholders of the predecessor were concerned the reorganization resulted in the receipt by them of stock in a new corporation in place of the stock formerly owned by them, but we can not be guided solely by such results. The acts of the two corporations are the determining factors.

The predecessor corporation by appropriate act of its directors made an offer to the petitioner to sell its assets for the petitioner’s stock. This offer was accepted by the petitioner through the appropriate act of its directors. Herein the instant case differs from the case of United States v. Board, supra, which was relied on by the petitioner. In that case the court had for its consideration an agreement entered into between the Kentucky Wagon Manufacturing Co. and the stockholders of the Dixie Motor Car Co. The court pointed out that the stockholders had no authority to act for the Dixie Motor Car Co. and that they could transfer only the stock which they themselves owned. Consequently, in order to make the agreement enforceable, the court held that there had been an exchange of stock for stock. In the case at bar it is noted also that immediately after the reorganization the petitioner set up in its books of account, as assets and liabilities, the assets and liabilities of its predecessor and it does not appear that any of the stock of the predecessor corporation was set up in its books.

In view of the foregoing we are of the opinion that the reorganization was effected through the sale of the assets of the predecessor corporation to the petitioner, it being immaterial that the stock received in payment therefor was distributed in accordance with a certain schedule which had received the prior approval of stockholders of the old corporation. Section 326(a)(4) of the Revenue Act of 1918 provides that there may be included in invested capital—

Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest.

The total amount of petitioner’s stock outstanding on March 3, 1917, was $325,000. Consequently, the largest amount that may be included in petitioner’s invested capital on account of intangibles acquired from its predecessor upon reorganization will be one-fourth of that amount, namely, $81,250,

Relative to the second issue the petitioner contends that if the Board should find that there was an exchange of assets for stock it should be allowed to include in invested capital the sum of $81,250 on account of intangibles. In support of this contention each of three witnesses testified that in his opinion there had been invested in the business from the date of its first organization in 1903, to the end of 1913, the sum of $300,000; that at the end of 1913 the tangible assets of the predecessor corporation were worth $100,000; and that the intangible assets, including patents, patent applications and good will, were worth $200,000. One of these witnesses, William P. Martin, had had experience in manufacturing enterprises and for some time previous to his becoming interested in the petitioner had investigated a great many business concerns from a standpoint of personal investment. He testified that his opinion was based on a thorough personal investigation of the predecessor corporation; that he was satisfied that the intangible assets were worth $200,000, and that the issuance of $277,700 par value of stock for all the assets, both tangible and intangible, was very conservative. Walter Clyde Jones, another of the witnesses, was a stockholder and a director of the predecessor corporation and had served for many years as its patent attorney. He testified that, based on his knowledge of the old corporation and the experience gained by him in the conduct of a large patent practice, the intangibles of the predecessor corporation were worth $200,000. The other witness, Walter D. Steele, an engineer and former stockholder of the old corporation, testified that in his opinion, based on his knowledge of the conduct of the business of the predecessor corporation, its intangibles were worth $200,000. The petitioner also points out that, eliminating the earnings of the petitioner for the year 1914 as being subnormal, the earnings for the five years, 1915 to 1919, inclusive, averaged $46,626.39 on average tangible assets of $209,263.65, and that capitalizing the average annual profits on a basis of 20 per cent after deducting a return of 8 per cent on average tangible assets would give a value to intangibles of $149,426.50.

Counsel for the respondent argues that the increase in earnings of the petitioner over those of its predecessor were due mainly to the injection of new capital and management into the business, and that, if the stock issued in exchange for the assets of the old corporation was worth par, after deducting therefrom the value given by the petitioner to the tangible assets, amounting to $132,013.85, plus liabilities assumed, which amounted to $19,415.53, the value of the intangibles would be $126,270.62.

He points out that the petitioner admitted that the predecessor corporation made improper entries in the development and patent accounts set up in its books; that the earnings of the predecessor corporation were not sufficient to provide even a reasonable return on tangibles; that no dividend was paid on either the common stock or the third preferred stock during the years 1914, 1915, and 1916, and that the dividend paid in 1917 on those classes of stock amounted to only 7% per cent on common stock and 3 per cent on third preferred stock. In view of the foregoing, he argues that, having in mind the conditions which obtained prior to 1914, the stock was not worth par and furthermore that no acceptable method has been presented whereby the value of the intangibles may be ascertained.

We are convinced, however, that the patents, patent applications, and good will of the predecessor corporation were worth a substantial sum at the time they were acquired by the petitioner. The testimony adduced at the hearing shows that the resources of the business prior to the time it was acquired by the petitioner were expended in developing and perfecting time-recording mechanisms and in developing a sales field for the perfected devices. During the year 1913 the predecessor corporation was in a position, as far as perfection of product and sales field were concerned, to take up a manufacturing program on a large scale, but due to lack of capital and management it was unable to convert potentialities into actualities. It enjoyed patent protection to such an extent that serious competition existed only as a remote possibility.

That the business had reached a point where it was capable of making material progress is indicated by the fact that after one year’s operation with the investment of only $25,000 additional capital the petitioner began to make comparatively large profits. It is reasonable to assume that the petitioner required a year to build up and perfect its manufacturing processes. If we disregard the earnings of the year 1914 as a measure of the earning power of the business and capitalize the earnings of the petitioner’s first representative year, namely, 1915, on a 10 and 20 per cent basis, an intangible valuation of $84,590.85 is indicated.

We have indicated in other cases that opinion evidence is to be considered with caution. Nevertheless, the testimony of William P. Martin, the organizer and moving spirit of the petitioner, is impressive. From his testimony it appears that he has had considerable experience in manufacturing enterprises; that for months prior to the organization of the petitioner he had examined and investigated the business and products of its predecessor; that he was induced to become interested in the business by reason of its possibilities; that the tangible assets of the predecessor were of minor importance from a manufacturing standpoint, and that the chief value of the business lay in its intangibles.

It has been pointed out that the petitioner can not include in invested capital on account of intangibles more than $81,250, and, in view of all the evidence submitted, we are of the opinion that the value of the intangibles received by the petitioner in exchange for its stock was at least equal to that sum.

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

Considered by Littleton, Trussell, and Love.

       Loss.

       Based on estimated inventory December 31, 1913.


source: Caselaw Access Project

author: Teussell :

license: Public Domain

text:
    Johnson Undertaking Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7018.
    Promulgated November 4, 1927.
    Personal Service Classification as to One Branch of Business — Denied.—Petitioner engaged in sale of caskets at wholesale prices and in the general undertaking business, using the same valuable fixed assets in both departments without any practicable segregation, and which assets, representing invested and borrowed capital, were material income-producing factors. Helé that the undertaking department was not a distinctly separate branch of the business and that said department was not personal service in character.

      Philip L. Billings, G. P. A., and W. F. Frame, Esq., for the petitioner.

      Arthur H. Murray, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes in the amount of $2,825.78 as asserted by respondent against petitioner for the fiscal year ended May 31, 1920.
    Petitioner alleges that respondent erred in denying petitioner personal service classification of the undertaking branch of its business and in refusing to compute petitioner’s tax liability for the said taxable period in accordance with the provisions of section 303 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner, the Johnson Undertaking Co., Inc., whose name was changed to Harback Undertaking Co., subsequent to the year in question, is an Iowa corporation with its principal place of business at 725 Sixth Ave., Des Moines.
    The Johnson Undertaking Co., Inc., was incorporated in the spring of 1919 for the purpose of establishing and maintaining a general jobbing and wholesale business of funeral supplies and also of conducting an undertaking establishment. Shortly after its organization petitioner purchased for cash and notes all the assets of L. Harback & Sons, which had been conducting a wholesale business of funeral supplies and an undertaking establishment. The assets acquired consisted of a two-story-and-basement brick building equipped for mortuary purposes and also with a crematory, which building is still being used by petitioner; three hearses; one Ford sedan; one Dodge sedan; one motor truck., and funeral merchandise and supplies. Petitioner began business on June 1, 1919, on which date its authorized capital stock was $150,000, consisting of 500 shares of common stock of a par value of $100 each and 1,000 shares of preferred stock of a par value of $100 each. Petitioner’s outstanding stock was $25,000 par value common stock and $50,000 par value preferred stock on June 1,1919, and $25,000 par value common stock and $35,000 par value preferred stock on May 31, 1920. On March 31, 1920, $10,000 preferred stock and on May 31, 1920, $5,000 preferred stock was retired by payment therefor in cash. The stockholders and their respective stockholdings were as follows:

    W. H. Johnson devoted his entire time to petitioner’s business as a whole, that is to the wholesale department and the undertaking department, acted as president of petitioner and conducted funerals, while H. F. Schoen devoted not more than one-half of his time in looking after petitioner’s accounts and finances. Schoen was during 1919 and 1920 vice president of the Des Moines Trust Co. and also had other business connections which consumed a good portion of his time. R. R. Welton was not in anywise connected with petitioner’s business except to attend directors meetings.
    Petitioner conducted a business of selling caskets to undertakers throughout the State of Iowa, which it termed its wholesale or jobbing department, and of selling funerals, that is a general undertaking business which petitioner termed its undertaking or retail department. For convenience the business will be described by the so-called departments. The business of the wholesale department consisted of buying caskets from manufacturers at jobbers’ discounts of from 15 per cent to 50 per cent of the list prices and selling to undertakers at list or wholesale prices; the performing of undertaking services at wholesale prices for out-of-town undertakers and the use of the crematory for other undertakers. The undertaking department sold complete funerals for a lump sum which included use of crematory or use of operating room and fluids, price of casket, use of hearses, cost of services of petitioner’s employees, and the personal services of the one who directed the funeral services and looked after all necessary details. The chapel was used if so desired by petitioner’s clients and it was quite often rented to other undertakers in which to conduct funeral services. Petitioner also hired its hearses to other undertakers. During the year in question petitioner employed seven or eight persons, two of whom, a shipping clerk and a truck driver, worked entirely in the wholesale department while the others worked in both departments of the business.

      Both, departments of petitioner’s business were conducted in its own building at 725 Sixth Aye. The basement floor was used for the repository, crematory, garage, and heating plant. The first floor was used for the chapel, offices, operating room, dressing room, and for the show room in which caskets were displayed. The second floor was used for the stock and shipping room and there was also a small apartment for the employees’ use. Except for the stock room and the motor truck, all of petitioner’s building and equipment was used in one or both departments.
    From June 1, 1919, petitioner kept one set of accounts with no segregation as to the two departments, until about May, 1920, at which time the accountants auditing the books suggested a segregation of the accounts of the two departments so that petitioner in its income-tax return might claim personal service classification as to its undertaking department and compute its tax under section S03 of the Revenue Act of 1918. During May and June of 1920 the accountants employed by petitioner made up a new set of accounts from the old books and attempted to segregate the various items of assets, liabilities, expenses, incomé, etc. Where it was clear as to the department under which a particular item should be posted it was so posted in the new set of accounts, and as to other items arbitrary segregations were made based supposedly upon the use made by each department, but in most every instance merely divided fifty-fifty. The record does not show accurately how much use the undertaking department made of the crematory, operating room, dressing room, show room, hearses or chapel.
    Petitioner’s balance sheets attached to its return show the following:

      Surplus Analysis

    Additions:
    May 31, 1920 — Earnings_$34, 226.10
    Deductions:
    March 24,1920 — Dividends_$408. 33
    May 31, 1920_ 360. 00
    - 758.33
    Balance_-_ 33,467.77
    The accounts receivable represent moneys due petitioner in both departments but the record does not show the respective amounts due as to each department. The $75,000 notes payable on June 1, 1919, were mostly on the land and building acquired.
    Petitioner made its return for the fiscal year ended May 31, 1920, based upon its reconstructed sets of accounts and computed its tax liability under the provisions of section 308 of the Revenue Act of 1918. Respondent determined that the undertaking department was not, during that year, a distinctly separate branch of petitioner’s business; that the undertaking department was not entitled to personal service classification, and that petitioner was not entitled to compute its tax liability under said section 303, resulting in the deficiency in tax here in question.
   OPINION.

Teussell :

Section 303 of the Revenue Act of 1918 provides:

That if part of the net income of a corporation is derived (1) from a trade or business (or a branch of a trade or business) in which the employment of capital is necessary, and (2) a part (constituting not less than 30 per centum of its total net income) is derived from a separate trade or business (or a distinctly separate branch of the trade or business) which if constituting the sole trade or business would bring it within the class of “ personal service corporations,” then (under regulations prescribed by the Commissioner with the approval of the Secretary) the tax upon the first part of such net income shall be separately computed (allowing in such computation only the same proportionate part of the credits authorized in sections 311 and 312), and the tax upon the second part shall be the same percentage thereof as the tax so computed up on the first part is of such first part: Provided, That the tax upon such second part shall in no case be less than 20 per centum thereof, unless the tax upon the entire net income, if computed without benefit of this section," would constitute less than 20 per centum of such entire net income, in which event the tax shall be determined upon the entire net income, without reference to this section, as other taxes are determined under this title. The total tax computed under this section shall be subject to the limitations provided in section 302.

The record in this proceeding establishes that the undertaking department was not during the fiscal year ending May 31, 1920, a distinctly separate branch of the business, but rather that the two departments combined were operated as one business enterprise. The fixed assets were used in both departments in such a manner that a true segregation was impracticable and upon the evidence the arbitrary segregation is not acceptable.

However, aside from the bookkeeping records of petitioner’s business, we are satisfied from the record that the two departments were conducted in close relation to one another and as one business. There were some inter-department transactions such as the sale of caskets by the wholesale department to the undertaking department, but the record is not clear as to just what transpired. The record is clear that funerals were sold by the undertaking department at lump-sum prices, clients were taken to the showroom where they made their selections of caskets, on which no prices were quoted if it could be avoided, and the total price per funeral was fixed according to the expensiveness of the casket and after the net profit was determined it was distributed by some method not shown. The two departments were not distinctly separate as required by the above quoted section of the Act.

Petitioner has introduced testimony to the effect that undertaking establishments may be conducted without the use of invested capital and without owning its own building, hearses, etc., by simply renting or hiring such equipment, but this petitioner did actually have and used in its undertaking department valuable fixed assets representing invested and borrowed capital which were material factors in producing its income from both departments. Also, not all of its principal stockholders were actively engaged in petitioner’s business as required by section 200 of the Revenue Act of 1918 for personal service classification.

We are thus brought to the conclusion that the undertaking department was not during the year in question a distinctly separate branch of petitioner’s business and is not entitled to personal service classification, thát petitioner is not entitled to have its income-tax liability computed in accordance with the provisions of section 303 of the Revenue Act of 1918, and respondent must be sustained. See H. F. Suhr & Co. v. Commissioner, 5 B. T. A. 95.

Judgment 'mill he entered for the respondent.

Considered by Littleton, Smith, and Lorn


author: Tkussell:

text:
    A. M. Gutterman & Sons Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10458.
    Promulgated November 4, 1927.
    1. Bad Debts. — Where petitioner ascertained a debt to be worthless to the extent of $15,000 and charged off same to that extent during 1921, held to be a proper deduction from gross income for that year.

      2. Invested Capital. — Adjustment of invested capital made by the Commissioner on account of income and profits taxes for prior years, beld to be correct under section 1207 of tfie Revenue Act of 1926.

      E. E. Wakefield, Esq., W. G. Magathan, Esq., and J. Marvin Haynes, Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
    This proceeding results from the Commissioner’s determination of a deficiency in the amount of $2,917.27 in petitioner’s income and profits tax for the year 1921.
    Petitioner alleges that the Commissioner erred in his determination—
    (1) In disallowing a deduction for 1921, in the amount of $15,000, alleged to be that portion of a bad debt ascertained to be worthless and charged off during 1921.
    (2) In reducing invested capital for income and profits taxes for years prior to 1921 paid subsequent to December 31, 1920.
    (3) In reducing invested capital for income and profits taxes of the year 1920 or any other year paid during the taxable year 1921.
    FINDINGS OF FACT.
    Petitioner is a Maine corporation with its principal place of business at Boston, Mass. During the year 1921 it dealt in sole leather and cut shoe soles, selling to jobbers of sole leather and shoe manufacturers. Prior to 1921 it had also dealt in shoe findings, that is, materials used in the manufacture of shoes such as upper leather, linings, felts, eyelets, laces, etc. Louis Gutterman was during 1921, and had been since 1912, the owner of substantially all of petitioner’s stock. Also, Gutterman was president and treasurer of petitioner during 1921.
    Since 1891, Louis Gutterman in various capacities has been engaged in the business of buying and selling shoe leather and findings and also in the manufacture of shoes. In 1919 he decided to engage in the manufacture of shoes and in September, 1919, Louis Gutterman, Coleman Hands, and Robert W. Marshall organized the Coleman-Robert Shoe Co., hereinafter referred to as the Shoe Company, a corporation with a capital stock of $25,000, paid in cash. Gutterman took 55 per cent of the stock and was treasurer of the Shoe Company. The Shoe Company leased one floor of a building in South Boston and the three stockholders immediately began to assemble the necessary equipment for the manufacture of shoes. The entire capital of $25,000 cash and some additional borrowed money was expended by the time actual manufacturing was commenced in February, 1920. The business of the Shoe Company proved to be unprofitable due to the general depression in the shoe-manufacturing business during 1920, and in July, 1920, the plant was shut down. The plant remained intact, but idle during the balance of 1920 and all of 1921, during which time unsuccessful efforts were made to sell the plant as a whole, for most of the machinery in the plant had been leased from the United Shoe Machinery Co. and the balance of the equipment and materials on hand were more or less especially adapted to the manufacture of a certain type of men’s shoes.
    During the short time the Shoe Company was operating and also during a part of 1920 and during 1921 petitioner loaned the Shoe Company various sums of money to meet its expenses and at the end of the year 1921 the Shoe Company was indebted to petitioner in the amount of $25,805.
    The assets and liabilities of the Shoe Company at December 31, 1921, were, as shown by the books, as follows:

    However, the above figures represented the cost or book value of the assets in relation to the Shoe Company’s plant as a whole at the time it was shut down in 1920. At the close of the year 1921, the equipment had greatly deteriorated due to the long period which the Shoe Company’s plant remained idle.
    The item of inventory ($9,498.53) consisted of leather, linings and various other materials partly cut up ready for the manufacture of a special type of shoe. Those materials were in a dried up and deteriorated condition, were not marketable and were not worth more than $2,000.
    The item of machine parts ($33†.64) consisted of various small parts for replacements in the machines used in manufacturing shoes and had but little value except in the operation of the plant.
    The item of machinery ($5,582.91) consisted of machines bought by the Shoe Company, such as sewing machines, which were in addition to the machinery leased from the United Shoe Machinery Co. Such machinery was salable at secondhand values unless the plant was sold as a unit.
    The items of power and transmission ($3,211.44) and factory equipment ($5,543.01) consisted of pulleys, belts, motors, shelves, benches, racks, shipping facilities, etc., especially fitted for the rooms occupied by the Shoe Company and were of little, if any, value except as a part of the plant as a unit. A blower system for ventilation especially fitted to that plant and which cost about $1,600 to install is included in the equipment.
    The items of lasts, dies and patterns ($9,374.92) were for the special shoes manufactured by the Shoe Company and were of no value unless the plant was again operated on the same basis as before it shut down.
    Louis Gutterman was familiar with the plant and equipment of the Shoe Company at all times and had endeavored unsuccessfully to sell the plant of the Shoe Company. On the basis of the facts as above set out he had the account of the Shoe Company charged off to the extent of $15,000, on the books of A. M. Gutterman & Sons Co. in closing that company’s books for the year 1921. In its return for the year 1921 the A. M. Gutterman & Sons Co. took a deduction to the amount of $15,000 as a bad debt, which the Commissioner disallowed.
    In 1922, the assets of the Shoe Company were taken over by A. M. Gutterman & Sons Co., the principal creditor, and later during the same year said assets were charged off the books of the latter company and charged to Louis Gutterman, personally, in the amount of $25,010. Louis Gutterman never paid the company anything and the reason for the book transaction was to enable Louis Gutterman to show possible prospective purchasers of said assets the cost of same and also to enable him to negotiate individually. During the latter part of 1922 the Hutton-Johnson Co. was formed, Louis Gutterman contributed the assets of the old Shoe Company, and two other men each contributed $12,500 cash. The $50,000 stock of the new company was divided equally between the three. A considerable portion of the $25,000 cash was spent in putting the old Shoe Company’s plant in condition for operation, but it was never operated and in 1923 the Hutton-Johnson Co. sold out to the Diamond Shoe Co. for $8,500. Louis Gutterman received about $5,500 in the final distribution.
    For the year 1918, petitioner paid an additional income and profits tax in the amount of $8,094.87 which the Commissioner deducted from invested capital in his computation of petitioner’s tax liability and in determining the deficiency for the year 1921.
   OPINION.

Tkussell:

Upon the record the petitioner’s deduction in the amount of $15,000 as the extent to which the debt in question was not recoverable, the said debt having been ascertained to be worthless to that extent and having been charged off its books in closing the same for the year 1921, is a proper deduction and should be allowed under section 234 (a) (5) of the Revenue Act of 1921. See Appeal of Stieglitz, Treiber Co., Inc., 1 B. T. A., 452,

The adjustment of petitioner’s invested capital for the year 1921 as made by the Commissioner on account of income and profits taxes for years prior to 1921 must be sustained under section 1207 of the Revenue Act of 1926.

Judgment will be entered upon 15 days’ notice, pursuant to Rule 50.

Considered by Littleton, Smith, and Love.


author: Trussell :

text:
    Howard Webster Byers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10319.
    Promulgated November 4, 1927.
    Exempt income. — During the years under consideration the petitioner held by appointment a position as attorney and counsel for the Des Moines board of waterworks trustees at a fixed annual salary. Held, that his compensation was that of an officer or employee of a State or municipal subdivision thereof and was so exempt from income taxes.

      G. L. Byers, Esq., for the petitioner.

      Arthur H. Murray, Esq., for the respondent.
    The petitioner has complained of deficiencies in income taxes for the years 1920 to 1923, inclusive, in the aggregate amount of $758.27, and alleges that the Commissioner has erroneously added to petitioner’s gross income for such years amounts received by him as attorney and counsel for the board of waterworks trustees of the city of Des Moines, Iowa.
    FINDINGS OF FACT.
    Under the provisions of acts of the Legislature of the State of Iowa and.ordinances of the city of Des Moines, there was created and established in the said city of Des Moines in the latter part of the year 1919, a board of waterworks trustees, and pursuant to State and municipal legislation the said board acquired a plant for the purpose of furnishing water for the use of people of Des Moines and the said plant and its equipment thereupon became a municipally owned property.
    During all the times herein mentioned the petitioner was a lawyer engaged in the practice of his profession in the city of Des Moines.
    On March 10, 1920, the board of waterworks trustees, at a regular session, adopted a resolution as follows:
    On motion of Mr. Wilcliinski, seconded by Mr. Worth, it was Resolved that Mr. I-I. W. Byers, Counsel for the City, he and is hereby retained as the Legal Counsel for the Board of Waterworks Trustees, at a compensation of $2,500.00 for the year beginning April 1, 1920; it being understood that the compensation will be allowed on the same basis for the month of March, 1920. The motion was unanimously adopted.
    The petitioner accepted the arrangement provided for by such resolution and during the years 1920 to 1923, inclusive, received compensation as follows:
    For the year 1920-$2, 674. 65
    For the year 1921_ 2, 500. 00
    For the year 1922- 2, 500. 00
    For the year 1923_ 2, 083. 30
    The petitioner, acting under advice and in confident belief that the compensation thus received by him was exempt from income tax, omitted these amounts from his individual income-tax returns for the several years. The Commissioner added these respective amounts to petitioner’s income for each of the years claimed and thus produced the deficiencies complained of.
   OPINION.

Trussell :

It is well settled that compensation of officers and employees of States and municipal subdivisions thereof is exempt from the Federal income tax. And, while this principle has become the settled law of the land, difficulties and uncertainties arise in determining who are officers and employees of States and municipal subdivisions thereof. That is the issue in the instant case.

Chapter 288 of Laws of the 38th General Assembly of the State of Iowa granted to certain cities the power to own, construct, acquire, and maintain and operate waterworks within their corporate limits and authorized such cities to appoint the directors of waterworks trustees who should have supervision over and be responsible to the city council of all details of administration and operation of such waterworks.

In September, 1919, the city council of the city of Des Moines enacted an ordinance by which it adopted—

A plan for the management of the waterworks and creating and establishing a board of waterworks trustees, providing for the appointment of the members thereof, fixing their terms of compensation, describing the powers and duties of such board * * *.

And, in section 3 of said ordinance it was provided that such board of waterworks trustees shall have general supervision over the waterworks and be responsible to the city council for all details of administration and operation of such waterworks. It shall immediately after its organization make and prescribe all the necessary rules for the government and operation of such waterworks. It shall employ a general manager and treasurer and such accountants and assistants as may be necessary in the conduct of the business incident to the operation of the waterworks, and they shall hold office at the pleasure of the board.

Pursuant to this legislation the said board of waterworks trustees adopted the resolution set out in the findings of fact for the purpose of employing the petitioner in the capacity of counsel and general advisor. The petitioner accepted such employment and continued to hold said appointment during all the years here under consideration.

We are of the opinion that the petitioner thus became and continued to be an employee of the political subdivision of the State of Iowa, that the compensation which he received for services rendered to the board of waterworks trustees of the city of Des Moines is exempt from income taxes. John E. Mathews, 8 B. T. A. 209; P. Frank Durkin, 4 B. T. A. 748. There are no deficiencies for the years 1920 to 1923, inclusive.

Judgment of no deficiency will be entered.

Considered by Littleton, Smith, and Love.


author: SteRnhagen :

text:
    Armin L. Kelly, Administrator, Estate of Oliver Warren Kelly, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7092.
    Promulgated November 5, 1927.

      John M. Cole, Esg., for the petitioner.

      J. F. Greaney, Esg., for the respondent.
    Deficiency in estate tax of $4,256.55. The respondent held two transfers to be in contemplation of death, one of 1,749 shares and the other of 903 shares of the O. S. Kelly Co.
    findings of fact.
    Oliver Warren Kelly, hereinafter called the decedent, died, after a short illness, at Springfield, Ohio, on October 31,1922, aged seventy. He had some intestinal trouble for three or four years about which he had occasionally consulted a physician. He attended to his business regularly.
    On April 1, 1920, he caused a formal transfer to be made on the books of the O. S. Kelly Co. of 1,749 shares (out of a total outstanding of 3,500 shares) of its stock, then standing in his name, to his children, Armin L., Katherine, and Louise. These shares he had owned prior to 1913, and he continued to be the record owner thereafter. This transfer was not made in contemplation of death.
    On July 12, 1921, decedent caused 903 shares of stock in said company to be transferred to his three children. These shares were part of 1,399 shares originally owned by decedent’s father, O. S. Kelly, prior to his death in 1904, and were part of the father’s estate. On these 1,399 shares, decedent received the dividends from 1906 until July 12, 1921. The will of O. S. Kelly contained the following provisions:
    Item 2. I give and bequeath to my wife Ruth Ann Kelly, in lieu of dower, year’s support and all other claims against my estate, all of my household goods and furniture, horses and buggy and all other articles of my personal use and also an annuity of Thirty-six hundred ($3600) Dollars payable in sums of Three hundred ($300) Dollars a month on the first of each and every month after my decease during her natural life; the same to be and remain a first lien and charge upon my real estate in the City of Springfield, Ohio, known as “ The Arcade ” and situate on the Bast side of Fountain Square and extending from High to Washington Streets.
    Item 3. I give and bequeath unto each of my two daughters-in-law, Kate Kelly, wife of my son O. W. Kelly — and Martha Kelly, wife of my son B. S. Kelly, a legacy in the sum of Ten Thousand ($10,000.00) Dollars.
    Item 4. I give and bequeath unto each of my grandchildren, who may be living at the time of my death, whether now born or not, the sum of One Thousand Dollars, the said legacy of each to be held by its father without interest and without bond and paid over to such child at majority, the legacy of any such grandchild dying without issue before majority to remain the absolute property of its father; and I hereby request, but do not require, of each of my said sons that he shall present to each child of his who may be born after my decease a like sum of One Thousand ($1000) Dollars at majority as a legacy from me.
    Item 5. All the rest, residue and remainder of my estate, real, personal and mixed which I may own at the time of my decease, I give, devise and bequeath unto my two sons Oliver W. Kelly and Bdwin S. Kelly share and share alike.
    Item 6. I hereby constitute and appoint my said sons Oliver W. Kelly and Edwin S. Kelly the Executors of this my will, and direct that no bond be required of either of them as such Executor, and that no inventory, appraisement or sale of my personal property be made.
    Edwin S. Kelly declined to serve as executor, and in 1906 assigned his entire interest under the will to the decedent. O. S. Kelly was substantially indebted to the company.

      The corporation declared dividends in 1913, 1914, 1916, and 1917, and none in 1915, 1918, 1919, 1921, or 1922. These dividends were applied against certain longstanding worthless accounts of the corporation. On October 12, 1920, as a means of discharging the legacies to the wife and four children of E. S. Kelly, aggregating $14,000, the corporation declared a 10 per cent dividend of $13,990 on the 1,399 shares. This amount was used to discharge these legacies. The legacy of $10,000 to decedent’s wife, Kate Kelly, was not paid. She died on October 28, 1920, leaving all her estate by will to her children, Armin L., Louise, and Katherine. These three children renounced their legacies under the O. S. Kelly will and waived payment thereof in probate court. The decedent, as executor of the estate of O. S. Kelly, filed his final report on May 25,1921, containing the following:
    Probate Court, Clark County, Ohio.
    Estate of Oliver S. Kelly, dec’d.
    First & Pinal Report of Oliver W. Kelly, Executor.
    Oct. 1920
    Said Executor charges himself with 10% Dividend from O. S.
    Kelly Co_$13, 990. 00
    and claims credit for legacies paid as follows:
    Voucher #1 Martha C. Kelly-$10, 000.00
    “ 2 Leah Kelly Foos_ 1,000.00
    “ 3 Ruth K. Fay_ 1,000.00
    “ 4 Martha L. Kelly_ 1, 000. 00
    “ 5 O. S. Kelly_ 1,000.00
    - 14,000.00
    Balance due Executor- 10.00
    Said Executor respectfully reports that no other assets of said estate have come into his hands or to his knowledge, excepting the said Dividend and 1399 shares of the Capital Stock of said O. S. Kelly Co., which he still holds; and that no claims against said estate have been presented to him for payment and that no such claims exist to his knowledge, except a claim of the O. S. Kelly Company, payment of which has been waived by said Company with the consent of all its stockholders, as appears by their written consent and a certified copy of a Resolution of the Board of Directors of said Company, both hereto attached. That Edwin S. Kelly, to whom a half interest in said estate was bequeathed by said testator, has assigned all his interest in said estate to said Oliver W. Kelly, to whom the other half interest in said estate was given by the Will of said Oliver S. Kelly, deceased. Assignment attached.
    That the legatees to whom payment has been made as above shown, are all of the legatees mentioned in the Will of said O. S. Kelly, deceased, excepting Kate Kelly, Louise Kelly Ultes, A. L. Kelly and Katherine Kelly, who have each renounced their said legacies and waived payment thereof as appears by their written waiver hereto attached.
    Said Executor, therefore, asks that the foregoing be accepted as his final account, and that upon payment of all costs due this Court, he may be authorized to transfer into Ms individual name the said 1399 shares of stock of The O. S. Kelly Co., he being solely entitled to the same, and desiring to take the same in kind.
    Oliver W. Kelly
    Executor of Oliver S. Kelly, dec’d.
   OPINION.

SteRnhagen :

The decision whether these two transfers were made in contemplation of death is governed by two different fundamental considerations. The transfer of 1,749 shares was made more than two years before death, and that of 903 shares was made within two years. As to the latter, there is the statutory presumption of section 402 (c), Revenue Act of 1921, that the transfer is deemed to have been made in contemplation of death; and as to the former, there is no such statutory provision and hence no presumption. As to the latter, the evidence for the petitioner must overcome the presumption, and as to the former his burden is only that ordinarily upon the proponent.

As to the transfer of 1920, we see no evidence that it was made in contemplation of death, and the respondent has introduced no basis for his determination that it was. So far as the record discloses, this was entirely arbitrary. Whether the decedent made the transfer in 1913, as is contended (that of 1920 being said to be merely formal), or in substance in 1920, there is no evidence that at either time there was such apprehension of death as to give the transfer a testamentary character. We reverse the Commissioner and hold that it should be excluded from the gross estate.

As to the later transfer, the evidence is in our opinion not sufficient to overcome the statutory presumption against petitioner. He sets up circumstances which he contends establish that the transfer gave to the transferees only what they were entitled to, and invokes thb statutory provision as to a bona fide sale for a fair consideration. But the renunciation by them of their legacies was complete and the decedent so stated in his report to the probate court. So far as appears, decedent was under no legal constraint as to these shares, and his transfer was entirely voluntary. We so hold. Thus the statutory presumption is that the transfer was in contemplation of death. From the evidence, it can not be said that it was not so made. In fact, it may or may not have been so made. Cf. C. D. Lehman, Executor, 6 B. T. A. 791. We sustain the respondent as to the second transfer.

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

Considered by Akundell.