author: Keen:

text:
    Rawlings Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101277.
    Promulgated April 10, 1941.

      Charles C. Allen, Jr., Esq., and Richard 8. Jones, Esq., for tbe petitioner.

      R. E. Transw, Esq., for the respondent.
   OPINION.

Keen:

Petitioner’s position in this proceeding is based upon the primary assumption that this liability based on an additional excise tax is not to be treated as a tax liability, but is to be treated as a business expense or loss and, therefore, subject to the rules applicable to business losses. That provision of the acts allowing deductions for taxes accrued or paid, depending on the basis of the taxpayer’s report, is an exclusive section. Taxes which actually accrue against a taxpayer or which are paid by him can not be deducted under any other provision than section 23 (c). “The general must succumb to the specific”, Pacific Employers Insurance Co. v. Commissioner, 89 Fed. (2d) 186. The petitioner, therefore, has attempted to point out that the excise tax upon sporting goods imposed by section 609 of the 1932 Act was not actually a tax upon itself, but rather one upon the vendee. In support of his contention he has pointed to section 625 of the act of the same year. The section last referred to, however, does not present the general basis of the excise tax, but specifically refers only to cases where the manufacturer had entered into contracts for the sale of taxable goods prior to May 1, 1932. We are not concerned here with any application of that sectionj nor do we feel that the inference which petitioner has drawn therefrom is correct. As we view the tax, it is upon the transaction (i. e., the sale by the manufacturer) and the vendor is liable for its payment, although the effect thereof is not to put the manufacturer out of pocket, inasmuch as he adds the tax to the sale price, which makes the ultimate purchaser the actual taxpayer. The liability for the payment to the Government of that tax, however, is the manufacturer’s. Cf. Elmira Arms Co., 7 B. T. A. 703; R. C. Musser, 3 B. T. A. 498; George E. Hamilton, 6 B. T. A. 240; A. Eisenberg, 11 B. T. A. 574; George M. Coham, 11 B. T. A. 743; Shearer v. Commissioner, 48 Fed. (2d) 552, affirming 18 B. T. A. 465.

Inasmuch as we disagree with petitioner’s contention that the tax imposed by section 609, about which this controversy centers, was not upon this petitioner, we are forced to disregard his theory of business expenditure or loss. Assuming, as is here the case, that petitioner accrues or pays a tax assessed against itself, then the only relief afforded by way of Federal income tax deduction is to be found in section 23 (c).

Petitioner has not based his deduction on section 23 (c), however. On the contrary, he has specifically avoided this contention. The difficulty of claiming a deduction based on that section has been disclosed in United States v. Anderson, 269 U. S. 422; American Cigar Co., 21 B. T. A. 464; affd., 66 Fed. (2d) 425; Great Northern Railway Co., 30 B. T. A. 691; Continental Baking Corporation, 30 B. T. A. 354; and Floyd, Inc., 43 B. T. A. 101. In the last cited case this Board said:

* * * It is well settled that the liability for Federal income tax is incurred in the year for which the tax is imposed, irrespective of the time the tax may be assessed or may become due and payable, for, all of the events upon which the tax is predicated having occurred in that year, the amount of the tax liability is then fixed by law and ascertainable. * * *

Although this excise tax liability seems to have been a decidedly complex matter, conducive to distinct differences of opinion as to what sales were taxable, nevertheless we see no reason for laying down a rule with regard to the time when the liability for Federal excise taxes is incurred different from that applicable to the liability for Federal income tax, which is also frequently complex and involves differences of opinion.

Petitioner, on the accrual basis, could only have availed himself of a deduction in the earlier years for which the tax was imposed, not in the year here claimed, and then only by virtue of the provisions of section 23 (c).

Decision will be entered for the respondent.

       It is only when taxes are unconstitutionally levies or illegally assessed that they are deductible as business losses. Cf. E. L. Bruce Co., 19 B. T. A. 777. But see Cartew Mills, Inc., 42 B. T. A. 894.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    The Tonopah Mining Company of Nevada, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100393.
    Promulgated April 10, 1941.

      George E. H. Goadner, Esq., and Helen Goodner, Esq., for the petitioner.

      Paul'E. 'Waring, Esq., for the respondent.
   OPINION.

Smith:

This proceeding is for the redetermination of deficiencies for 1936 and 1937 in the amounts of $4,014.77 and $6,126.65, respectively. The only question in issue is whether the petitioner is entitled to depletion deductions on a percentage basis in 1936 and 1937 in respect of royalties which it received in those years from the operation of a gold and silver mine by its lessees.

The petitioner is a Delaware corporation with its principal office at 570 Bullitt Building, Philadelphia, Pennsylvania. It filed its income tax returns for the years 1936 and 1937 with the collector at Philadelphia.

Since about 1901 the petitioner has been the owner of a gold and silver mine known as the Tonopah Mine, located near Tonopah, Nevada. The petitioner itself operated the mine until February 1930, when it was temporarily closed. In October 1930 the mine was reopened under a plan whereby certain areas were leased to small groups of miners on a royalty basis. After the ore was mined it was handled entirely by the petitioner until finally disposed of. From the proceeds petitioner retained its royalties and returned the balance to the lessees. Such royalties were received by the petitioner in the amounts of $108,997.78 in 1936 and $134,646.14 in 1937 and those amounts were reported by the petitioner in its income tax returns for those years.

In its 1936 return petitioner claimed a depletion deduction in the amount of $16,349.67, representing 15 percent of the $108,997.78 of royalties received in that year. The return contained the following statement:

The Tonopah Mining Company of Nevada hereby elects to have the depletion allowance for all of its mining property located at Tonopah, Nye County, Nevada, for the year 1936 and for future taxable years, when any ore is extracted therefrom, determined under the percentage depletion provisions of Section 114 (b) (4) of the Revenue Acts of 1934 and 1936, unless and until the statutes are changed and/or the taxpayer is given a new election.

Likewise, in its 1937 return petitioner claimed a depletion deduction of $20,196.92, being 15 percent of the amount of royalties received in that year.

The petitioner did not claim any depletion deductions in respect of its Tonopah Mine in its income tax returns for the years 1923 to 1935, inclusive, the March 1, 1913, value of the mine, as determined by the respondent, as well as the cost of the mine to the petitioner, having been completely exhausted through depletion deductions at the close of the year 1922.

No statement was made by the petitioner in its income tax returns for 1934 or 1935 with respect to any election to take depletion deductions on the percentage basis. Its net income for 1934 was $42,728.04 and for 1935 was $43,136.86.

The depletion deductions claimed by the petitioner in its returns for 1936 and 1937 were disallowed by the respondent for the reason that the petitioner had failed to state an election in its 1934 return to have a depletion allowance computed on the percentage basis.

Petitioner’s contentions are, first, that it is entitled to make an election to take percentage depletion deductions under section 114 (b) (4) of the Eevenue Act of 1936, and, in the alternative, that it was not necessary in the circumstances for it to make any election in order to be entitled to take depletion deductions in its 1936 and 1937 returns, computed on the percentage basis.

It is provided in section 23 (m) of the Revenue Act of 1934' that there shall be allowed as deductions in computing net income:

(m) Depletion.—In tbe case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to tbe peculiar conditions in each case; * * *

Section 114 (b) (4) of that act provides:

(b) Basis fob Depletion.—
(4) PERCENTAGE DEFLECTION FOE COAL AND METAL MINES AND SULPHUR.-The allowance for depletion under section 23 (m) shall be, in the case pf-coal mines, 5 per centum, in the case of metal mines, 15 per centum, and, in the case of sulphur mines or deposits, 23 per centum, of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the-taxpayer in respect of the property. Such allowance shall not exceed' 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property. A taxpayer making his first return under this title in respect of-a property shall state whether he elects to have the depletion allowance for such property for the taxable year for which the return is made computed with or without regard to. percentage depletion, and the depletion allowance in respect of such property for such year shall be computed according to the election thus made, If the taxpayer fails to make such statement in the return, the depletion allowance for such property for such year shall be computed without reference to percentage depletion. The method, determined as above, of computing the depletion allowance shall be applied in the case of the property for all taxable years in which it is in the hands of such taxpayer, or of any other person if the basis of the property (for determining gain) in his hands is, under section 113, determined by reference to the basis in the hands of such taxpayer, either directly or through one or more substituted bases, as defined in that section.

Section 114 (b) (4) of the 1934 Act was reenacted without change in the 1936 Act, with the added provision :

The above right of election shall be subject to the qualification that this paragraph shall, for the purpose of determining whether the method of computing the depletion allowance follows the property, be considered a continuation of section 114 (b) (4) of the Revenue Act of 1934, and as giving no new election in cases where such section would, if applied, give no new election.

The respondent’s position is that the petitioner, having failed to exercise an election to have its depletion allowance computed on the percentage basis in its return for 1934, its first return filed under that act, is not entitled to such depletion deductions in its later returns for 1936' and 1937.

In support of his contentions the respondent relies upon Riley Investment Co. v. Commissioner, 311 U. S. 55, and Walter C. Hill, 41 B. T. A. 245.

In Riley Investment Co. v. Commissioner, supra, the Court held that the taxpayer, a- gold mining corporation, was not entitled to percentage depletion for 1934 under section 114 (b) (4) of the 1934 Act where the depletion allowance was first claimed in an amended return for 1934 filed on March 3, 1936; that such amended return was not a “first return” within the meaning of the statute. In its opinion the Court said:

Sec. 114 (b) (4) of the 1934 Act requires the taxpayer to elect in his “first return” whether the depletion allowance was to be computed with or without regard to percentage depletion. The method so elected is applicable not only to the year in question but to all subsequent taxable years.
* * * Petitioner is seeking by this amendment not only to change the basis upon which its taxable income was computed for 1934 but to adopt a new method of computation for all subsequent years. That opportunity was afforded as a matter of legislative grace; the election had to be made in the manner and in the time prescribed by Congress. The offer was liberal. But the method of its acceptance was restricted. The offer permitted an election only in an original return or in a timely amendment. An amendment for the purposes of § 114 (b) (4) would be timely only if filed within the period provided by the statute for filing the original return. No other time limitation would have statutory sanction. To extend the time beyond the limits prescribed in the Act is a legislative not a judicial function.
* ⅞ * ⅞ * * *
* * * It seems clear that Congress provided that the election must be made once and for all in the first return in order to avoid any such shifts. And to require the administrative branch to extend the time'for filing on a showing of cause for delay would be to vest in it discretion which the Congress did not see fit to delegate.

In Walter C. Hill, supra, we held that, where the taxpayers failed to elect percentage depletion in their original returns for 1934, 1935, and 1936, they were not entitled to make such an election in amended returns for those years filed in 1939. See also Dorothy Glenn Coal Mining Co., 38 B. T. A. 1154.

The petitioner makes the argument that, although it failed to state an election of percentage depletion in its first return filed under the 1934 Act, it was granted a new right to make such an election by section 114 (b) (4) of the 1936 Act. We do not think that there is any merit in this contention. Obviously, the reenactment of section 114 (b) (4) of the 1936 Act was intended as a continuation of the provisions of the same section of the 1934 Act. It is specifically provided that the section gives no new election “for the purpose of determining whether the method of computing the depletion allowance follows the property.” By no reasonable construction can it be said to confer a new right of election where there has been no transfer of the property. The Supreme Court was fully cognizant of the provisions of section 114 (b) (4) of the 1936 Act when it said in Riley Investment Co. v. Commissioner, supra, that the method elected in the first return under the 1934 Act “is applicable not only to the year in question but to all subsequent taxable years.”

It is obvious, we think, that in the reenactment of section 114 (b) (4) in the 1936 Act Congress did not intend to give any new election to taxpayers who had failed to comply with the provisions of the 1934 statute in making their election of percentage depletion in their first return filed under that act.

If the petitioner had had no net income for 1934 or 1935 it would not have been incumbent upon it to make an election with regard to percentage depletion for either year. Pittston-Duryea Coal Co. v. Commissioner (C. C. A., 3d Cir.), 117 Fed. (2d) 436. But, since it bad a net income for each year, it is now too late for it to make an election.

The respondent was not in error in disallowing the depletion allowances claimed by the petitioner in its 1936 and 1937 returns.

Decision wül be entered for the respondent.


author: TüeneR:

text:
    A. L. Killian Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98691.
    Promulgated April 10, 1941.

      George E. H. Goodner, Esq., for the petitioner.

      Benjamin L. Bird, Esq., for the respondent.
   opinion.

TüeneR:

The petitioner contends that the transaction in 1935 ■whereby its notes in the sum of $80,000 given as part of the purchase price of the Mathewson property were canceled upon the payment of $5,000 in cash and the execution of new notes in the sum of $55,000 constituted an adjustment or reduction in the purchase price of the property; that the value of the property at that time had shrunk to $50,000; and that such transaction did not result in the realization of taxable income, but only in a reduction of liability and a consequent diminution of loss. It relies on Bowers v. Kerbaugh-Empire Co., 271 U. S. 170; Hextell v. Huston, 28 Fed. Supp. 521; appeal dismissed on motion of Government, 107 Fed. (2d) 1016; and Borin Corporation, 39 B. T. A. 712; aff'd., 117 Fed. (2d) 917. Petitioner also quotes an excerpt from Palmer v. Commissioner, 302 U. S. 63, which involved substantially different facts but wherein the Supreme Court said that “one does not subject himself to income tax by the mere purchase of property, even if at less than its true value, and that taxable gain does not accrue to him before he sells or otherwise disposes of- it:”

The respondent contends that the transaction in 1935- constituted a cancellation of a part of petitioner’s indebtedness; that its obligation to pay this indebtedness was absolute; that it was not insolvent or financially embarrassed; that the property remained in its possession and continued to have a fair market value of not less than $60,000; and that it therefore realized taxable income in the amount of the canceled indebtedness, or $20,000. Among other cases he cites United States v. Kirby Lumber Co., 284 U. S. 1; Commissioner v. Coastwise Transportation Co., 71 Fed. (2d) 104; certiorari denied, 293 U. S. 595. He relies particularly on L. D. Coddon & Bros., Inc., 37 B. T. A. 393, and Kalman Hirsch, 41 B. T. A. 890.

We think the petitioner’s contention must be sustained. We are convinced that the transaction in 1935 amounted to nothing more than a reduction in the purchase price of the property. While it did result in a reduction in the amount of petitioner’s indebtedness, that fact standing alone does not establish that petitioner realized taxable income. All the facts must be considered in the determination of that question.

The present case is distinguishable from and is not controlled by L. D. Coddon & Bros., Inc., supra. In that case the value of the property at the time of the transaction was sufficient to pay the indebtedness, whereas in the present case the value of the property was not in excess of the reduced purchase price. This factual distinction was recognized in the Goddon case, supra, and the very question now present in the instant case was left open in that case. Commissioner v. Coastwise Transportation Co., supra, is likewise distinguishable.

The respondent states on brief that no distinction is perceived between the present case and the recent case of Kalman Hirsch, supra. We agree with that statement, but since the filing of briefs our decision in that case has been reversed by the Circuit Court of Appeals for the Seventh Circuit, 115 Fed. (2d) 656. There the petitioner purchased real property for $29,000. Partial payments were made until the taxable year, at which time the balance remaining due was $15,000. At that time the property had depreciated in value to $8,000 and petitioner began negotiations with the mortgagee for settlement. He offered to convey the property to the mortgagee in full satisfaction of the debt. The creditor refused, but said he would take $8,000 in payment of the balance of $15,000 remaining due. This proposal petitioner accepted and upon receipt of $8,000 the mortgagee released the mortgage. The court held that the cancellation of that portion of the indebtedness did not result in income, but was equivalent to a voluntary reduction of the purchase price, and that gain or loss would not result to petitioner until he disposed of the property. Following that decision, we hold that the transaction in question amounted to a reduction in the purchase price of the property and resulted in no taxable gain to petitioner. On a similar set of facts the same conclusion was reached in Hextell v. Huston, supra. See also Borin Corporation, supra, and Pirkney Packing Co., 42 B. T. A. 823.

The petitioner, contends that its contributions to the Y. M. C. A. and the.chamber of commerce were items of ordinary and necessary expenses paid during the taxable year in carrying on its trade or business and hence are deductible under section 23 (c) of the Revenue Act of 1934. The respondent disallowed the deductions on the ground that they were “donations” and not ordinary and necessary business expenses.

We think the respondent erred in disallowing these deductions. The petitioner has shown that by making the contributions it was believed an increase in business would result and that a direct benefit to its business in excess of the amounts contributed did result. We hold that these two items are deductible as business expenses. Terminal Railroad Association of St. Louis, 17 B. T. A. 1135; Fairmont Creamery Corporation v. Helvering, 89 Fed. (2d) 810; Old Mission Portland Cement Co. v. Commissioner, 69 Fed. (2d) 676; First National Bank in St. Louis, 23 B. T. A. 1125; and Emery, Bird, Thayer Dry Goods Co., 20 B. T. A. 796. The taxpayers made no such showing in the cases relied upon by the respondent.

Another issue involving a bad debt deduction was waived by petitioner at the hearing.

Decision will he entered voider Rule SO.


author: TdeneR :

text:
    Seward City Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92099.
    Promulgated April 10, 1941.

      Burdette Boyes, for the petitioner.

      William V. Crosswhite, Esq., for the respondent.
   OPINION.

TdeneR :

Petitioner now concedes that the amount of depreciation allowed by the respondent is probably correct, but with respect to that portion of the deduction disallowed relies on its allegation that the amount thereof was a loss resulting from the ice damage above described. It is conceded that it was improper to classify ice damage as depreciation, but it is claimed that the amount of such ice damage was in excess of the depreciation disallowed and that petitioner is entitled to the deduction of the amount of loss sustained, under section 23 (f) of the Revenue Act of 1934.

The respondent contends that the petitioner is not entitled to a loss deduction because it has not established that any loss was sustained during the taxable year, and on brief argues further that petitioner has failed to prove the basis for the allowance of any deduction for loss sustained as herein claimed.

The evidence, shows that the damage to petitioner’s mill occurred during the latter part of December and during January of the taxable year. During that period the ice jam caused the damage to the underpinning of the structure and the southwest corner settled and threw the spouting and machinery out of alignment. The loss, if - any, occurred at that time. Respondent states on brief that it is his “theory” that the loss was due to the deterioration of the mill which had been occurring over a period of years and that such deterioration became noticeable during the taxable year.- That “theory” is supported only by inference. The petitioner’s president testified that the foundation of the structure was in good condition before the, ice jam and that in his opinion it was in no better condition after it was repaired. The evidence shows that during the following year more than $1,800.27, the amount now claimed, as a deduction, was expended in restoring the mill to its condition prior to the damage. We conclude that the loss was sustained during the taxable year and that the amount thereof was at least equal to $1,800.27, the amount by which petitioner’s income was increased by respondent through the disallowance of a portion of the depreciation deduction claimed.

With respect to respondent’s argument as to basis, it is to be noted that his notice of deficiency indicates a basis far in excess of the loss claimed and proven and, under such circumstances, the petitioner was not required to put the question of basis in issue and thereby take on the unnecessary burden of proving a point which respondent’s own determination accepts as established.

We hold that petitioner is entitled to the deduction claimed. No evidence has been presented with respect to the 10 percent penalty asserted by the respondent and it is accordingly sustained. Another issue raised by the respondent in an amended answer and a claim for an increased deficiency were abandoned by him at the hearing.

Decision, will Toe entered wider Rule 50.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      * " * * * * *'*
      (f) Losses bt Corporations.—In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.


author: TURNER:

text:
    Ames Reliable Products Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100624.
    Promulgated April 10, 1941.

      Ed. J. Kelley, Esq., for the petitioner.

      Gene W. Reardon, Esq., for the respondent.
   OPINION.

TURNER:

The Commissioner determined deficiencies for the fiscal year ended June 30, 1937, of $2,218.16 in the petitioner’s income tax and $398.13 in its excess profits tax. The only issue presented is whether $10,000 of a bonus voted by the directors of the petitioner to its president accrued during the taxable year.

The facts were stipulated and as stipulated constitute our findings of fact.

The petitioner was incorporated on September 16, 1919, under the laws of the State of Iowa and is engaged in the manufacture and sale of poultry feeds, with its principal office at Ames, Iowa.

On June 26, 1987, the board of directors of petitioner adopted the following resolution:

Moved by C. G. Lee, seconded by J. M. Mnnsinger, that tbe bonus of W. T. Barr be adjusted at $12,000.00 * * * that $2,000.00 of tbe bonus to W. T. Barr be paid at once, and $10,000.00 be paid wben all outstanding bonds bave been retired and tbe cash position of tbe Company warrants.

Pursuant to said resolution $2,000 of the bonus was forthwith paid to W. T. Barr, president of the petitioner.

For the fiscal year ended June 30, 1937, the petitioner kept its books on the accrual basis and set up on its books as an expense for that period the unpaid balance of bonus of $10,000, which amount appeared as a liability on petitioner’s books as at June 30, 1937. Its first mortgage bond indebtedness at the beginning of said fiscal year was $14,000, which liability was reduced to $12,000 at the end of the fiscal year.

The following is a copy of the minutes of a meeting of the board of directors of the petitioner held on December 1,1938:

* ⅜ * * sfc ⅝ *
At a meeting of tbe Board of Directors of the Ames Reliable Products Company held on tbe above date the following Directors were present:
W. T. Barr C. G. Lee
P. F. Hopkins C. P. Barr
J. H. War bur ton J. M. Munsinger
F. H. Schleiter
Tbe meeting was called to order by tbe President, W. T. Barr.
The Minutes of tbe last meeting were read and approved. It was stated that tbe purpose of tbe meeting was to discuss and attempt to clarify tbe intention of tbe Directors regarding a resolution passed by tbe Board on the 26th day of June, 1937. After explanation and discussion tbe following resolution was offered:
Whereas, tbe Board of Directors of tbe Ames Reliable Products Co. on the 26th day of June, 1937, passed a resolution adjusting tbe bonus to be allowed W. T. Barr, Manager, for tbe year ending June 30, 1937, fixing tbe same at the sum of $12,000.00; and
Whereas, tbe Directors of said Company remain tbe same as they were on said date, and there are present at this meeting all of tbe Directors who participated in tbe meeting of June 26, 1937, except Director Geo. Myers; and
Whereas, said resolution was passed in good faith with the understanding and intention that said bonus should be established in favor of tbe said W. T. Barr and as an obligation against said company, and that tbe same should be paid as soon as the cash position of tbe Company would permit; and
Whereas, the cash position of the Company is now such as to permit the payment of s'aid bonus; and
Whereas, The Revenue Department of the United States Government has criticized and erroneously interpreted the wording of said resolution on the ground that it is indefinite and uncertain; and
Whereas, this Board desires to make clear the intention and carry out the purpose of said resolution.
Now, Therefore, Be It Resolved that this Board now declare that it was its understanding and intention at the time of passing said resolution that the amount of said bonus was and should be established as an obligation in favor of the said W. T. B'arr and as against said corporation at the time of the adoption of said resolution, and that said bonus should be paid as soon as the cash position of the Company would warrant, and that in harmony with said resolution hnd purpose, the unpaid portion of said bonus be now paid in full.
Moved by C. G. Lee, seconded by J. M. Munsinger, the adoption of the above resolution. Motion carried unanimously.
No further business appearing the meeting adjourned.
F. H'. Schleiter, Secy.

In accordance with the resolution adopted by the board of directors of petitioner on December 1, 1988, the said $10,000 balance was thereupon paid to W. T. Barr.

In its income tax return for the fiscal year ended June 30, 1937, the petitioner claimed the full $12,000 as a deductible bonus: In determining the deficiencies in controversy the respondent allowed only $2,000 of the amount claimed and disallowed the balance of $10,000 on the- ground that the liability on the part of the petitioner for the payment of the amount did not accrue prior to June 30, 1937.

Petitioner contends that by reason of the’ adoption by its board of- directors of the resolution of June 26, 1937, it incurred a definite and fixed liability to pay its president a bonus of $12,000 and that said amount accrued during its taxable year ended June 30, 1937, and was an allowable deduction for such year. As to the portion of the bonus not paid during the taxable year and disallowed by the respondent, namely $10,000, the respondent contends that the resolution merely created a contingent liability against the petitioner, the contingencies being the future retirement of the corporation’s bonded indebtedness and its cash position being such as to warrant the making payment of such amount; that it was not until the adoption by the directors of the resolution of December 1, 1938, that an obligation to pay said amount was created and a definite and fixed liability on the part of the petitioner therefor was incurred; and that therefore the $10,000 was not an allowable deduction from income for-the taxable, year ended June 30, 1937.

The only information contained in the stipulation with respect to petitioner’s bond indebtedness is that the amount of bonds outstanding was $14,000 at the beginning of the taxable year and $12,000 at the close. There is nothing in the stipulation to show that the petitioner had any definite plans for the retirement of the remaining bonds, neither do we have any information as to the financial or cash condition of petitioner during the taxable year other than may be inferred from the payment of the $2,000 bonus to W. T. Barr and the retirement of $2,000 of bonds. According to the terms of the resolution of June 26, 1937, .the further payment of $10,000 was contingent upon the retirement of the outstanding bonds and the cash position of the company warranting it. There was-no fixed or certain obligation .to pay until the occurrence of those events. We know that the bonds were not retired and the only inference that may be drawn from the record is that the cash position of the company was not such at any time during the taxable year as to warrant the payment of the $10,000 here in question. Accordingly it may not be said that the said sum would ever become payable. It may be that the directors felt sure that the events would occur, but that feeling does not remove the contingency which they-themselves placed in the resolution. Furthermore, the resolution of December 1, 1938, adopted after the deduction herein had been questioned by the respondent, does not change the situation. Bather than indicating that the contingency was not intended, the latter resolution indicates that the directors recognized that the obligation to pay was contingent upon the cash condition of the company warranting and as to that the declaration was that “the cash position of the Company is now such as to permit the payment of said bonus.” There is no showing that the cash condition of the company was such at any time prior to December 1, 1938. The liability for the said sum did not accrue during the taxable year and the action of the respondent in disallowing the deduction claimed is sustained. Commissioner v. Brooklyn Radio Service Corporation, 79 Fed. (2d) 833, reversing 31 B. T. A. 269. Cf. Commissioner v. Ox-Fibre Brush Co., 281 U. S. 115.

Decision will be entered whder Rule 50.


author: • Smith:

text:
    American Package Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101266.
    Promulgated April 16, 1941.

      J. G-. Komer, Jr., Esq., for the petitioner.
    ■ Lloyd W. Oreason, Esq., for the respondent.
   OPINION.

• Smith:

In its income tax return for 1937 the petitioner reported normal tax in the amount of $2,540.03. The respondent has determined the normal tax to be in the amount of $2,534.16. The petitioner did not report any undistributed net income. The respondent determined that it had an undistributed net income of $6,097.27. The petitioner contends that it had no undistributed net income for the reason that it was paid out to certain of the subsidiary companies which had a,d-vanced it money to enable it to pay necessary expenses. In its petition the petitioner alleges in part:

(j) At and after the time of its creation and organization American-Package Corporation (the petitioner) contracted debts for various expenses, including charter fees, legal and accounting services, technical services, travel expenses, office supplies, and other similar items, the amount of which was hot determined or determinable until after December 31, 1936. Soon after January 1, 1937, these amounts were definitely ascertained and the petitioner discharged them with money borrowed for that purpose. The amount of these items was $7,169.40. All this occurred long prior to August 26, 1937.

This allegation of the petitioner has been denied by the respondent in his answer. It is not clear from the record whether the expenses which are claimed to have accrued in 1937 accrued in that year or not. Nor is it clear that the amounts would be legal deductions of 1937 even if accrued in that year. At least a part of the expenses related to the costs of organizing the petitioner corporation and they may have represented, not ordinary and necessary expenses of carrying on a trade or business, but capital expenditures. It is significant that the petitioner in its tax return for 1937 did not claim the amounts as deductible expenses of 1937.

There is no difference between the petitioner and the respondent as to the dividends paid credit for 1937. Both parties are in agreement that the dividends paid in 1937 amounted to $141,519 and that the petitioner is entitled to a dividend carry-over from 1936.of $1,995.86, making the dividends paid credit for 1937 $143,514.86. The respondent determined that the petitioner had an undistributed net income for 1937 of $6,097.27 and there is no evidence to show that his computation is in error.

The second question for consideration is whether the petitioner is a personal holding company within the meaning of section 352 of the Revenue Act of 1936, added by the Revenue Act of 1937. That section carries its own definition of a personal holding company for purposes of the tax imposed by section 351. It is as follows:

SEC. 352. DEFINITION OF PERSONAL HOLDING COMPANY.
(a) General Rule.—For the purposes of this title and of Title 1 the term “personal holding company” means any corporation if—
(1) Gross income requirement.—At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 353; * * *
(2) Stock ownership requirement.—At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.

The term “personal holding company income” used in section 352 (a) (1), above, is defined in section 353 (a) of the Revenue Act of 1936, added by the Revenue Act of 1937, as follows:

For the purpose of this title the term “personal holding company income” means the portion of the gross income which consists of:
(a) Dividends, interest, royalties (other than mineral, oil, or gas royalties), annuities.

In the instant proceeding 100 percent of the petitioner’s gross income for the taxable year 1937 was for dividends. Thus, the gross income requirement is met.

It has been stipulated that:

* * * more than 50 percent in value of petitioner’s outstanding stock is owned by or for not more than five individuals within the meaning of section 351 (b) (1) of the Revenue Act of 1936 as amended by the Revenue Act of 1937.

Section 354 (a) (2) of the Revenue Act of 1936, added by the Revenue Act of 1937, provides in material part as follows:

SEO. 354. STOCK OWNERSHIP.
(a) Constructive Ownership.—For the purpose' of determining whether a corporation is a personal holding company, insofar as such determination is based on stock ownership under section 352 (a) (2), section 353 (e), or section 353 (f)— * » ■ * * * * *
(2) Family and partnership ownership.—An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For the purposes of this paragraph the family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.

In view of the stipulation of the parties, it must be held that the second contention contained in the definition is likewise met in this case.

The petitioner does not deny that technically it comes within the definition of a personal holding company as defined above. It contends, however, that it does not come within the intendment of the statute. It argues that the law was aimed at purely holding companies and not operating companies, which it claims to be. It submits that it has been subjected to capital stock tax upon the ground that it was an operating company. We are asked to disregard the corporate entities of the subsidiaries and consider them as merely branches or departments of petitioner’s organization, although the subsidiary companies have made returns not as mere branches of the petitioner but as separate operating corporations.

The facts are that the petitioner was organized in the manner in which it was organized for the purpose of constituting a reorganization within the meaning of the Kevenue Act of 1934. In order to come within the provisions of the Kevenue- Act of 1934 the petitioner issued its shares of stock for the shares of stock of the four subsidiaries. While postponing tax liability in the reorganization in 1936, the petitioner finds itself within the ambit of the holding company provisions of the Kevenue Act of 1936, as amended.

The petitioner’s contention, that Congress in the enactment of the Kevenue Act of 1936 and 1937 did not intend to include as personal holding companies a company such as the petitioner, is sufficiently answered by the opinions of the Board in O'Sullivan Rubber Co., 42 B. T. A. 721, and Olean Times Publishing Co., 42 B. T. A. 1277. Cf. Noteman v. Welch (C. C. A., 1st Cir.), affirming 26 Fed. Supp. 437; Seaboard Small Loan, Corporation, 42 B. T. A. 715.

In our opinion the petitioner is a personal holding company within the meaning of the Revenue Act of 1936, as amended, and we discover no error in the determination of tax liabilities by the respondent.

Decision will be entered for the respondent.


author: Hill:

text:
    Herman Martin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97354.
    Promulgated April 16, 1941.

      Garl Pruzan, Esq., for the petitioner.

      B. H. Neblett, Esq., for the respondent.
   OPINION.

Hill:

In his petition, petitioner assigned as error the failure of respondent to allow a deduction of $473.38 representing the amount paid by him for “board, lodging and living quarters” during the taxable year, which, he further alleged, were furnished, him for the convenience of his employer.

The facts show that during the taxable year the petitioner was a wireless or radio operator, employed by the United States Army Engineers on dredging vessels. His base pay was $2,100 per. year, from which was deducted $40 per month for lodging and subsistence, except when petitioner was absent from ship on annual leave. He was a single man and maintained no permanent home on shore.

The deduction disallowed by respondent was claimed by petitioner under section 23 (a) of the Eevenue Act of 1936, which provides that in computing net income there shall be allowed as deductions, among other things, (a) all the ordinary and necessary expenses paid or incurred during the taxable year in carrying, on any trade or business, and (b) traveling expenses (including the entire amount expended for meals and lodging) while away from home in pursuit of a trade or business.

It seems plain that the deduction in controversy must come within the classification of traveling expenses incurred while away from home in pursuit of a trade or business if petitioner is to prevail; otherwise, the amount represents living expenses, the deduction of which is specifically prohibited by section 24 (a) (1) of the applicable statute. But we can not reach the conclusion that the amount represents traveling expenses incurred while away from home, since the parties have stipulated that petitioner was a single man, and maintained no permanent home on shore. “A taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms.”. New Colonial Ice Co. v. Helvering, 292 U. S. 435, 440. We think petitioner has not shown that he comes within the terms of the statute upon which he relies.

However, petitioner urges the further contention in effect that, if the amount claimed is not allowable as a deduction, it should he excluded from gross income on the theory that subsistence and quarters were furnished to him solely for the convenience of his employer. This contention is predicated on article 22 (a) (3) of respondent’s Regulations 94, and court and Board decisions, to which further reference will be made. The cited regulation provides that if living quarters are furnished to employees for the convenience of the employer the ratable value need not be added to the cash compensation of the employees, but if a person receives a salary as compensation for services rendered, and living quarters in addition thereto, the value of the quarters furnished constitute income subject to tax. The regulation also points out that the value of quarters furnished Army and Navy officers, or amounts received as commutation' of quarters, do not constitute taxable income. This regulation was based upon the decision in Jones v. United States, 60 Ct. Cls. 552, which held that the rental value of quarters occupied by an Army officer and the cash received by him for commutation of quarters did not constitute income taxable under the Revenue Act of 1921. In the Jones case the court, in a lengthy opinion, clearly indicates the dissimilarity between allowances and compensation, and it is this point that distinguishes the present proceeding from that decision. The same distinction is readily discernible in subsequent decisions of this Board.

In Arthur Benaglia, 36 B. T. A. 838, where the employer furnished food and lodging to the petitioner, solely for the convenience of the employer and as a necessary incident of the proper performance of the petitioner’s duties, we held that the value thereof was not taxable income to the petitioner. There, the value of the subsistence and quarters furnished the taxpayer was not a part of the compensation paid by the hotel company for his services. The meals and lodging constituted an allowance made by the employer for its own convenience and benefit. We said at page 840:

Under such circumstances, the value of meals and lodging is not income to the employee, even though it may relieve him of an expense which he would otherwise bear.

On the other hand, in Percy M. Chandler, 41 B. T. A. 165, we held that the rental value of a lodge was compensation for services rendered by the taxpayer and within his gross income, where it appeared that the lodge was occupied rent-free by the taxpayer and his family and was the property of the taxpayer’s wholly owned corporation, to which he rendered substantial services. In that connection we said (p. 118):

Chandler, as president of the farm corporation, performed substantial services for it in directing its business * * *. It is a fair inference tbat the occupancy of the lodge was permitted to him rent-free as compensation for the services which he rendered. Certainly there is no support in this record for treating the occupancy as a gratuity given to him by the corporation or as essential to the corporation in the conduct of its business.

In the present case, petitioner was required to receive his subsistence and occupy quarters on board ship by the exigencies of the situation, but the meals and lodging furnished to petitioner were obviously not considered or treated by him or his employer as an allowance or gratuity. Petitioner received compensation of $2,100 per year for his services, and paid to his employer $40 per month for his keep while on board ship. The entire amount of his compensation is taxable income to petitioner, without deduction or exclusion of his living expenses. Cf. Charles A. Frueauff, 30 B. T. A. 449.

The action of respondent is approved.

Reviewed by the Board.

Decision will be entered for respondent.


author: Disney :

text:
    Rowan Drilling Company, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98532.
    Promulgated April 17, 1941.

      Harry 0. Weeks, Esq., for the petitioner.

      James H. Yeatmm, Esq., for the respondent.
   OPINION.

Issue I.

Disney :

The petitioner admits that it is a transferee of the trans-feror, but contends that assessment of the tax liability of the transferor is barred by the statute of limitations by reason of the invalidity of the waiver executed on December 4, 1934, extending the statutory period of two years to June 30, 1935, and that therefore there is no transferee liability against the petitioner. Counsel for the petitioner frankly admits that “under the circumstances present here” the transferee was authorized to act for the transferor and “that the waiver which it executed was valid” and argues upon the same ground that the transferee had the right to have the merits of the case decided under the petition it filed upon the basis of the deficiency notice mailed on June 19, 1935, to the transferor, which petition was dismissed by the Board on March 13, 1939, for lack of jurisdiction. He quotes a statement appearing in the memorandum accompanying the Board’s order of dismissal to the effect that no one authorized to act for the transferor was a party to the proceeding, and contends that, if the Delaware corporation had no authority to file a petition under a deficiency notice sent to the Texas corporation, then the petitioner had no authority to sign the waiver in question here.

Counsel for the petitioner here represented the petitioner in the proceeding dismissed for lack of jurisdiction. The jurisdiction of this Board to redetermine deficiencies is not governed by the same statutory provisions as the limitation period for making assessments and the facts developed in one hearing may be sufficient to deny jurisdiction yet not enough to justify holding that a consent executed by the same corporation is invalid. Under the circumstances, we do not think that the facts and law forming the basis for the order of dismissal control the limitation question in this proceeding. Wayne Body Corporation, 22 B. T. A. 401; Stanley Co. of America, 26 B. T. A. 705; Union Shipbuilding Co., 43 B. T. A. 1143.

The fact that the consent bears the corporate seal of the petitioner instead of the transferor is not controlling. The statute requires nothing more than a consent (sec. 276 (b)) and waivers executed by a corporation other than the taxpayer have been held to be valid to extend the statutory period for assessment against the taxpayer. Illinois Addressograph Manufacturing Co., 31 B. T. A. 498, and cases cited therein on the point. The transferor here transferred all of its assets to the petitioner in 1934 and then dissolved. The transfer did not involve a change in name of the corporation or a change of officers, directors, or stockholders. Except for a change in the state of incorporation, there was no alteration in the identity of the corporation. A. H. Bowan, who signed the waiver, was vice president, manager, and a director of each corporation. He testified that in signing the consent he was acting for and on behalf of the Delaware corporation, the transferee. Little weight may be given such testimony in view of the fact that the Delaware corporation was not organized until 1934 and accordingly was not a taxpayer having tax liability to settle for 1932. To have executed a consent for a year for which there was no tax liability would have been a futile act. No contention is made that the consent was not intended to extend the statutory period for assessment of 1932 income tax of a corporate taxpayer and we think that taxpayer was the Texas corporation, the transferor. Under the circumstances, it seems clear that the seal of the Delaware corporation was affixed to the consent by mistake. See Crown Willamette Paper Co. v. McLaughlin, 81 Fed. (2d) 365; certiorari denied, 298 U. S. 674.

At the date of the execution of the waiver the transferor corporation was still in existence for the purpose of the execution of an instrument, for under the Texas statute the existence of a corporation is continued for three years after its dissolution for the purpose of enabling those charged with the duty to settle up its affairs. Rev. Civ. Stat., Texas 1925, Yernon’s Texas Stat. 1936, art. 1389. The waiver was executed within one year after dissolution of the trans-feror corporation, and by a vice president, one of those charged with the duty of settling up its affairs. We hold that the waiver was that of the transferor corporation, and operated to extend the statutory period for assessment against the transferor until June 30, 1935.

The deficiency notice to the transferor was mailed within that period, on June 19, 1935. Within 90 days thereafter, on September 16, 1935, a “proceeding in respect of the deficiency” was placed on the docket of the Board of Tax Appeals. That proceeding suspended the running of the statute of limitations on the making of the assessment until it became final by dismissal on March 13, 1939, and for a period of 60 days thereafter. Section 277, Revenue Act of 1932. Prior to the expiration of such period, on April 19, 1939, the notice of transferee liability was mailed and the present proceeding was instituted, on May 15,1939. We hold that the transferee liability of the petitioner is not barred by the statute of limitations.

Issue II.

The petitioner argues that, even though the statute of limitations does not bar assessment of transferee liability, the amount thereof is limited to the original deficiency of $4,616.84. In other words, petitioner contends that the respondent has no right, by affirmative pleading filed in a transferee proceeding, to ask for a deficiency against the taxpayer in excess of the amount theretofore assessed. It cites no statutory or other authority to support the argument and we find none.

Section 272 (e) of the Revenue Act of 1932 gives the Board jurisdiction to redetermine a deficiency greater than the amount set forth in the notice of deficiency if a claim therefor is asserted by the Commissioner at or before the hearing or rehearing. Section 311 provides that the liability of a transferee shall be, with exception not material, “assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title * * and that “Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.” (Italics supplied.)

These unambiguous provisions of the statute require no extended discussion as to> their meaning. They set up a procedure for the imposition of an increased deficiency and impose a liability upon a transferee, in general, for taxes of a taxpayer as asserted in any deficiency. The questions at issue here were raised to determine the correct tax liability of the transferor in order to gauge the extent of the liability of petitioner as a transferee. This transferee liability may be asserted without assessment against the taxpayer and it is not essential, under the circumstances here, that the respondent first proceed against the transferor. J. H. Johnson, 19 B. T. A. 840; City National Bank v. Commissioner, 55 Fed. (2d) 1073; Flynn v. Commissioner, 77 Fed. (2d) 180. We think the statute clearly authorizes the respondent, in a transferee proceeding, to ask for an increased deficiency against the taxpayer and a corresponding increase in the liability of the transferee.

Issue III.

The statement attached to the deficiency notice discloses that the transferor deducted a loss of $794 alleged to have been sustained in 1932 in the drilling of Christian Nos. 2 and 3 and Todd A-2. It computed the loss by deducting from amounts accruing to it in 1932 under the oil payments the cost of drilling the wells. In his determination of the deficiency the respondent converted the loss into gain by valuing the oil payments at 100 per cent of their face amounts and deducting therefrom the cost of drilling the wells. The petitioner alleged as error respondent’s action in holding that the oil payments should be valued at their face amounts and that the difference between the face amounts of the oil payments and the cost of drilling the wells should be included in gross income. The second amended answer of the respondent alleges that only the amount accruing to the transferor each year from production is includable in gross income and that the cost of the wells is recoverable by allowances for depletion.

The pleadings thus raise the question of what portion of the face amount of the oil payments should be regarded as income and whether the cost, of drilling the wells is recoverable therefrom, treating the difference as gain or loss, according to the result, or through allowances for depletion. Neither party, except respondent and he in the alternative, contends that the value of the oil payments constitutes gross income. In view of the positions of the parties and our conclusion on the issue raised by the pleadings, it is not necesary for us to find the value of the oil payments or to discuss the propriety of their inclusion in the transferor’s income. The cases of Anderson v. Helvering, 310 U. S. 404, and T. W. Lee, 42 B. T. A. 1217, fully support the method advanced by the respondent in his amended answer.

The petitioner argues upon brief that the drilling costs are deducible as ordinary and necessary business expenses, upon the authority of Edwards Drilling Co., 35 B. T. A. 341. There is no proof that the transferor treated the costs on its books and in its return as ordinary and necessary business expenses. The evidence is that the petitioner regarded the drilling contracts as investments in oil payments resulting in gain or loss in capital transactions, and that the respondent allowed the cost of the wells, not as ordinary and necessary business expenses, but as base of a capital asset. In any event, the pleadings do not raise as an issue the deductibility of the drilling costs as ordinary and necessary business expenses, and such an issue raised for the first time upon brief will not be considered by the Board. Jean Conrad, 27 B. T. A. 741; Hanby v. Commissioner, 67 Fed. (2d) 125.

The method set forth in respondent’s amended answer for determining the income of the transferor in 1932 under these oil payments is approved.

Issue TV.

In his determination of the deficiency the respondent disallowed as an ordinary and necessary expense deduction the sum of $13,700.73 incurred by the transferor in the drilling of four oil and gas wells for others, upon the ground that the expense should be deferred and deducted in the year in which the contracts were completed. Article 334 (b) of Regulations 77, was cited as authority for his action.

Article 334 of Regulations 77 provides two methods for reporting income from long term contracts, a term defined therein as “building, installation, or construction contracts covering a period in excess of one year.” It is plain that the contracts were not long term contracts as the term is used in the regulations, for the uncontradicted testimony here is that petitioner did not require more than about two weeks to drill an oil or gas well.

The force of this proof is apparently realized by respondent. On brief he confines his argument on the issue to statements that the cost must be capitalized and recovered through depletion deductions in subsequent years. The contention seems to be based upon the assumption that the wells were drilled for oil payments. The wells were drilled for cash in connection with petitioner’s business of drilling wells for others for hire, not for oil payments, and there will never be receipts from production subject to depletion. On this issue the petitioner is sustained.

Issue V. ■

The costs of drilling Christian No. 1 and Todd B-l and Todd B-2 were deducted by the transferor and’ allowed by the respondent as ordinary and necessary business expenses in 1981, the year in which the wells were completed. Oil payments, payable only out of production, were received as consideration for the drilling of the wells. The issue is whether the amounts received by the transferor in 1932 under the oil payments are subject to percentage depletion.

The contention of the respondent is that, since the investment of the .'transferor in the oil payments was recovered in full in 1931 by deductions taken and allowed as ordinary and necessary business expenses,.-there is no further cost to recoup by depletion. The petitioner argues that the taxpayer’s right to percentage depletion depends solely upon receipt of income from oil and gas wells and is not, therefore, contingent upon the existence of cost basis.

Section 114 (b) (3) of the.Eevenue Act of 1932 allows as a deduction fob depletion 27½ percent of the gross income from the property, but not in excess of 50 percent of the net income from the property and not less than an amount otherwise computed under the act. Provisions for allowance of depletion on other than a percentage basis are set forth in section 113.

No cases, have been cited by either party in which the precise issue was presented for decision. The respondent urges that, the point was involved and received consideration in Columbia Oil & Gas Co., 41 B. T. A. 38. In that case there was a sale of oil and gas leases and tangible equipment located thereon for cash, with a reservation by the seller of overriding royalties until a specified amount was recovered. The seller’s, right to royalties represented an interest in oil and gas in place, the cost of which was recoverable by allowances for depletion. The question was whether the taxpayer was entitled to recover in the transaction the basis of the whole property, or whether a portion thereof should be allocated to the oil interest reserved, and, if so, the amount thereof. We held that a specified part of the cost of the leases should be allocated to the oil interest reserved in the transaction. Herein, however, the question is different. We do not have before us the year analogous to that considered in the Oolmribia case, supra; that is, we do not have the year in which the oil payments were acquired and the drilling costs, the consideration therefor, were charged and allowed as ordinary and necessary expense. We have for consideration no question, as in the Columbia case, of allocating a base to oil payment rights, but only whether the statute gives the holder of such oil rights a right to percentage depletion. We think it does. Allowance for depletion upon the basis of a percentage of income under section 114 (b) (3) may exceed the base. The basis of computation is income, not cost or other basis. Percentage deduction may be allowed, though there is no basis with respect to the properties under consideration. I. T. 2327, VI C. B. 1, p. 18. Mead Coal Co. v. Commissioner, 106 Fed. (2d) 388, reversing C. H. Mead Coal Co., 38 B. T. A. 1163. In Sultana Oil Corporation, 40 B. T. A. 1196, percentage depletion was allowed under section 114 (b) (3) of the Bevenue Act of 1934, although intangible drilling and development costs had been deducted and allowed as expense, as herein. Such conclusion is contrary to respondent’s contention that recovery of the investment by deduction as ordinary and necessary expense precludes allowance of depletion. In Commissioner v. F. H. E. Oil Co., 102 Fed. (2d) 596; affd., 308 U. S. 104, on the authority of Helvering v. Wilshire Oil Co., 308 U. S. 90, the court reversed a memorandum opinion of the Board, and held that the Commissioner properly deducted from gross income intangible drilling and development costs deducted by the taxpayer as expense, in determining the taxpayer’s “net income,” within the provisions of section 114 (b) (3), to the effect that the 27½ percentage depletion allowance should not exceed 50 percent of net income from the property. In other words, the drilling expenses deducted affected the percentage depletion only as an element of computation of net income, and did not, merely as such drilling expense deducted, forbid allowance of percentage depletion on any theory of duplicated basé. In addition the record there showed, almost exactly as here, that an oil payment interest had been acquired by drilling done in the previous year, and that the drilling expense had in that year been deducted by the petitioner as ordinary expense and not restored to income by the respondent. Yet percentage depletion upon the proceeds from the oil payment interest was allowed in the taxable year. The petitioner here asks for just the same treatment. We think it must be accorded. On this point we sustain the petitioner.

The omissions of income derived in 1932 from the oil payments, the amounts of which are not in controversy, will be" reflected in the recomputation to be filed under Bule 50'.

Beviewed by the Board.

Decision will be entered wider Bule SO..

       SBC. 277. SUSPENSION OF RUNNING OF STATUTE.
      The running of the statute of limitations provided in section 275 or 276 on the making of assessments and the beginning of distraint or a proceeding in court for collection, in respect of any deficiency, shall (after the mailing of a notice under section 272 (a)) be suspended for the period during 'which the Commissioner is prohibited from making the assessment or beginning distraint or a proceeding in court (and in any event, if a pro ceeding in respect of the deficiency is placed on the docket of the Board, until the decision of the Board becomes final), and for 60 days thereafter.


author: SteRnhagen :

text:
    Goldfields of America, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101809.
    Promulgated April 17, 1941.

      Oonrad T. Hubner, Esq., for the petitioner.

      Arthur L. Murray, Esq., for the respondent.
   OPINION.

SteRnhagen :

The Commissioner determined a deficiency of $1,414.44 in income tax and $1,064.69 in excess profits tax for the 37ear ended July 31, 1936. He disallowed deductions taken for payments made under contracts for the use and purchase of mining property. The facts are all stipulated and are so found.

The petitioner is a Nevada corporation, with its office at San Francisco, California. In 1935 it was, either directly or by assignment, party to three contracts covering mines none of which was in production in the taxable year. Under the Wittenberg contract, petitioner in the taxable year paid $18,000; under the Jumping Jack contract, it paid $4,473.16; and under the Schubert contract, it paid $2,000. In each contract, specified payments having no relation to production were required at the time of execution and shortly thereafter. In each contract, all payments made were to be applied to the fixed purchase price and were the property of the vendor immediately upon payment. The payments made under the Jumping Jack and the Schubert contracts were within the prescribed initial amounts. Under the Wittenberg contract the prescribed initial payments amounted to $5,000, and hence so much of the $18,000 paid is like the payments under the other two contracts.

Under the Wittenberg contract, the petitioner was to pay 10 percent of the gross recovery of metals “as and for royalty and in consideration of the privilege of mining said property * * * said royalty in all cases to apply on the purchase price.” The petitioner agreed to pay a minimum royalty of $2,000 per month, which was likewise to apply on the purchase price. The petitioner had an option to buy; the vendor’s right to terminate the contract depended upon the petitioner’s default.

The petitioner demands a deduction for the full amount paid under the contracts in the taxable year 1936. If deductible, it must be under Revenue Act of 1936, section 23 (a). The payments were all in the first year of the contracts and must have been the fixed initial payments under the Jumping Jack and Schubert contracts and $5,000 under the Wittenberg contract. To this extent payments were not royalties, but were general consideration for the contract without relation to production. They impinge upon the contract throughout its entire term. They were expressly made as payments on account of the purchase price and not as annual rentals, royalties, or ordinary and necessary expenses of carrying on the trade or business. They are not deductible.

The remaining $13,000 paid under the Wittenberg contract must have been “minimum royalties” required by the contract to be paid if the prescribed 10 percent royalty was less than that amount. Since there was no production, there were no percentage royalties. The first and dominating provision of the contract is th*e grant to the petitioner of “a continuous and continuing option to purchase” the described mining ground and mining claims for the “purchase price of $500,000, the said purchase price to be paid as hereinafter provided.” The subsequent provisions set forth the method of payment of the purchase price. All payments either of a percentage of gross recovery “as and for royalty” or of “a minimum royalty” were to be applied to the purchase price of the entire property. During the operation of the contract each payment is therefore ambiguous. It may be royalty and it may be purchase price. Whether it is one or the other must await determination when the contract is either completely fulfilled by payment of the fixed price or by default or other optional termination at the petitioner’s election. During the subsistence of the contract the character of the periodic payments is indeterminate.

Deductions are limited by the language of the statute granting them. The payment of the minimum amount which by the contract is part of the purchase price can not be said to be a current expense of the taxpayer’s business, for it remains part of the purchase price until the taxpayer decides not to exercise its option to purchase or terminate the contract, Jordan Creek Placers, 43 B. T. A. 131; Helser Machine & Marine Works, Inc., 39 B. T. A. 644. Until the contract is terminated, no one can say that the taxpayer is not taking title, or that it has no equity; and this is a necessary finding to support the deduction allowed by section 23 (a), cf. Jefferson Gas Coal Co. v. Commissioner, 52 Fed. (2d) 120; Commissioner v. Jamison Coal & Coke Co., 67 Fed. (2d) 342. When made, the payments are primarily part of .the purchase price; the possibility of their being royalties is contingent upon the petitioner’s' future election not to acquire the-property. The conception of the contract as one of sale and purchase pervades its entire, duration. Burnet v. Hutchinson Coal Co., 64 Fed. (2d) 275, deals with minimum royalties under a lease with no provision for purchase, and therefore lacks an essential point of this controversy.-

Since tax deductions by the buyer are controlled by the language of the deduction-provision of the statute, there is no necessary reciprocal relation between them and the taxation to the seller of the periodic payments received by him, cf. Rotorite Corporation v. Commissioner, 117 Fed. (2d) 245; Virginia Iron Coal & Coke Co. v. Commissioner, 99 Fed. (2d) 919; certiorari denied, 307 U. S. 630; Indian Creek Coal & Coke Co., 23 B. T. A. 950; Edward E. Haverstick, 13 B. T. A. 937.

The Commissioner properly denied the deduction claimed.

Decision will be entered for the respondent.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses.—All the 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; traveling expenses (including the entire amount expended for meals and1 lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.


author: Akundell:

text:
    R. O. Holton & Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102255,
    Promulgated April 17, 1941.

      Giles J. Patterson, Esq., and 'Lucien H. Boggs, Esq., for the petitioner.

      J. Marvin Kelley, Esq., for the respondent.
   OPINION.

Akundell:

There are in substance three issues before us, the first two of which may be disposed of together. Contest arises initially over the taxability of interest payments collected during the taxable years which accrued and were defaulted before petitioner’s purchase of the municipal bonds on which they arose. The petitioner stands on the fact that the payments in question were identified as interest by the payor and that interest on bonds of the type here involved is exempt from Federal income taxation.

Purchase of the bonds in question included in the price paid not only the title to the securities, but the right to receive interest accrued and unpaid. As to the petitioner the whole constituted a capital acquisition and the subsequent payment of the defaulted interest was a return of a portion of his investment, regardless of the label attached by the payor.

This has been, consistently, our position in considering at other times the question here presented, when it related to nongovernment bonds. Erskine Hewitt, 30 B. T. A. 962; Great Southern Life Insurance Co., 33 B. T. A. 512, 530; affd., 89 Fed. (2d) 54; see Harr v. McLaughlin, 20 Fed. Supp. 27; affd., 99 Fed. (2d) 638. The consequence is that such interest payments in those cases were held not taxable as ordinary income but only as capital gain when such was realized.

These principles have application to nontaxable as well as taxable securities. The petitioner’s purchases of the right to receive defaulted interest and its collections under them constitute capital transactions, the gain on which is taxable without regard to the tax-exempt character of the securities. Willcuts v. Bunn, 282 U. S. 216. Under whatever name the payments were made by the municipalities to the petitioner, they were not consideration for the use of funds borrowed from the petitioner but were the return to it of invested funds. The petitioner’s argument, therefore, based on the label under which the payments were made by the issuer of the securities, must give way when it becomes apparent that the petitioner has received nothing in the nature of interest but has only recouped a portion of his capital investment. This point was ruled on, adversely to petitioner’s contentions, in William H. Noll, 43 B. T. A. 496, but without extended consideration. On the reasoning stated and on the authority of that case, the collections of interest defaulted before petitioner’s purchase of the bonds here involved must be held taxable.

The case of Landon v. Commissioner, 59 Fed. (2d) 989, relied on by petitioner, does not hold otherwise. That case involved an exchange of Virginia debt certificates for bonds of West Virginia. The Circuit Court of Appeals for the Second Circuit held that such exchange resulted in taxable gain to the extent of the value of the West Virginia bonds received in excess of the cost of the certificates turned in therefor. “The balance represents what is received as interest after the purchase, and is exempt.” By analogy as nearly as can be made, the accrued interest at the date of purchase formed a part of the petitioner’s basis, and only the interest accruing thereafter is to be treated as interest for tax purposes.

Collections of defaulted interest on municipal bonds by the petitioner during the taxable years are, accordingly, to be treated as return of capital, to be taxed as gain when such may be recognized. On the incomplete state of the record here it is impossible to determine with entire accuracy what portion of these collections may be taxed as gain. In our findings, relying on exhibits attached to the petition and the amended answer of the respondent, we have made division of them dependent on whether the bonds on which they arose were retained by the petitioner at the end of the year of collection. On the. failure of the petitioner to show the cost or other basis of bonds sold during the taxable years and thus to furnish facts from which capital gain or loss may be computed, all collections of defaulted interest on bonds which petitioner did not retain at the close of the year of collection must be taxed in their entirety as capital gain. Collections made, however, on bonds retained at the close of the year of collection must be attributed to a partial return of capital, any gain resulting thereon when disposition of the securities is made to be taxed at that time.

The second question, which petitioner seeks to relate to our disposition of the first, is the deductibility of interest paid to carry tax-exempt' obligations of subdivisions of state government. It is argued that our holding collections of defaulted interest taxable removes the tax-exempt character of the bonds, thus rendering inapplicable statutory denial of the deduction of interest paid on funds borrowed to purchase tax-exempt securities. See section 23 (b) of the Bevenue Act of 1936. The applicability of the statute to the instant situation is clear. The municipal obligations in question are clearly of the tax-exempt nature there contemplated. There is not included within the tax-exempt features of any such bonds immunity from every tax; capital gain on the sale of governmental securities has been held taxable, Willcuts v. Bunn, supra, without abridging the essential exemption. Here, from what has been said above, it will be plain also that we have done no more than tax such capital gain and thus in no essential way has the tax-exempt character of the securities carried by the petitioner been violated. Accordingly, the respondent must be sustained in his denial of these interest deductions.

The final question of whether petitioner - may inventory its nongovernmental securities at the market price at the close of the year 1937 must be determined on respondent’s argument that as to such securities the petitioner is not a dealer and is therefore not entitled to carry them in its inventory at any price. On this point also the respondent must be upheld. The proof is that petitioner’s business was the purchase and resale to customers of defaulted municipal bonds; that it made incidental purchase of nongovernmental securities for investment and speculation which in a few instances it sold to its customers ; that separate from these two activities it accommodates individual investors in St. Augustine by placing their orders for the purchase of securities with Jacksonville brokerage houses, without profit to itself. It is clear that a dealer in securities of limited types may not inventory either securities of other types as to which it is not a dealer, Vaughan v. Commissioner, 85 Fed. (2d) 497, or securities which it purchases for its own investment purposes. Hammitt v. Commissioner, 79 Fed. (2d) 494; Schafer v. Helvering, 83 Fed. (2d) 317; affd., 299 U. S. 171. The dealings of the petitioner resemble those of the taxpayers in the cases cited. Accordingly, it must be held that it was not a dealer in other than municipal securities and it may not inventory nongovernmental securities held by it at the close of 1937. Loss claimed as arising from readjustment of its inventory must, therefore, be denied to the petitioner.

Decision will he entered under Rule 50.


author: • TTtt.t. ;

text:
    Alaska Sunset Mines, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102362.
    Promulgated April 17, 1941.

      Tracy E. Qriffm, Esq., for the petitioner.

      Byron M. Coon, Esq., for the respondent.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the ease of a corporation the following credits shall be allowed * * *
      ****** •
      (c) Contracts Restricting Payment of Dividends.—
      (1) Prohibition on payment of dividends..—-An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. * * *
      (2) Disposition op profits of taxable year.—An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. * * *

   OPINION.

• TTtt.t. ;

The issue submitted in this case is whether or not petitioner is entitled to a credit in any amount against adjusted net income under section 26 (c) of the Revenue Act of 1936, quoted supra, on account of a contract executed prior to May 1, 1936, restricting payment of dividends or requiring a payment within the taxable year out of profits in discharge of a debt.

Petitioner’s contentions do not clearly appear from the record. In its income tax return for 1931, in the undistributed profits surtax computation, petitioner claimed a dividends-paid credit of $134,-841.29, which included a dividend carry-over from the preceding year of $94,008.08, but on brief petitioner says that it asserts no rights under section 27 (b) (2), providing for the dividend carry-over. In its petition, petitioner assigned as error the failure of respondent to allow a dividend credit under subdivision (2) of section 26 (c), supra, on account of $100,000 of preferred stock redeemed during the year 1937. In its original brief petitioner states that the payment in retirement of the preferred stock, because of the Baldwin contract, constituted an allowable dividend-paid credit in the amount of $26,-268.21 under subdivision (2) of section 26 (c). Yet petitioner presents some argument that it is entitled to credit also under subdivision 1 of that section.

Petitioner on brief disavows any claim of credit on account of a dividend carry-over under section 27 (b) (2), and we think ⅛ has shown no right to any credit under either subdivision of section 26 (c).

Under the Baldwin contract, petitioner purchased a dredge upon certain terms and for a stated consideration. As a part of the consideration for the sale of the dredge, petitioner agreed to raise additional capital to finance its mining operations in an amount of not less than $60,000 and further agreed that all of its preferred stock should be called in and retired before payment of any dividends on its common stock. The contract did not require petitioner to redeem its preferred stock at any time, nor that it should be redeemed out of profits. Petitioner simply was prohibited from declaring any dividends on its common stock until the preferred stock had been redeemed.

During the taxable year petitioner, for reasons satisfactory to it, decided to and did call in and redeem all of its preferred stock, and thereafter there was no restriction on the payment of dividends on its common stock. The amount required to redeem was materially in excess of the net profits as computed both by petitioner and respondent. Obviously, therefore, petitioner used other funds at least in part to effect such redemption. The fact that petitioner elected to use its profits to redeem its preferred stock, in the absence of any contractual requirement, does not entitle it to a credit under section 26 (c) (1). If it had elected to invest its profits in other assets, it would hardly have contended that it would thereby be entitled to such credit. Since the contract which prohibited the payment of dividends on common stock was fully discharged within the taxable year, section 26 (c) (1) can have no application, notwithstanding that petitioner did in fact apply its net profits of the taxable year in redemption of the preferred stock. Cf. Hub Clothing House, Ltd., 39 B. T. A. 900; Henry Mill & Timber Co., 43 B. T. A. 1073.

Petitioner is in no better position in respect of its principal contention, more strongly urged, that it is entitled to credit under subdivision (2) of section 26 (c). That subdivision, so far as pertinent here, allows as a credit an amount equal to the portion of the earnings and profits of the taxable year which is required by a provision of a written contract, expressly dealing with the disposition of earnings and profits of the taxable year, to be paid within the taxable year in discharge of a debt. The Baldwin contract did not expressly deal with the disposition of the earnings and profits of the taxable year, nor did it require that any portion of petitioner’s earnings and profits of the taxable year be used to redeem its preferred stock; and furthermore the amount so applied by petitioner was not “paid in discharge of a debt.” Certificates of preferred stock do not evidence indebtedness, but an investment in the corporate enterprise. Bolinger-Franklin Lumber Co., 7 B. T. A. 402, and authorities cited. See also Helvering v. Richmond F. & P. R. Co., 90 Fed. (2d) 971; Angelus Building & Investment Co., 20 B. T. A. 667; affd., 57 Fed. (2d) 130; O. P. P. Holding Corporation, 30 B. T. A. 337; affd., 76 Fed. (2d) 11.

Petitioner paid dividends during the taxable year on its preferred stock in the total amount of $26,268.21 and dividends on its common stock in the amount of $14,565, or total dividends of $40,833.21, for which respondent allowed petitioner a dividends-paid credit in computing surtax on undistributed profits. In our opinion petitioner is not entitled to any additional credit on account of redemption of its preferred stock pursuant to the Baldwin contract.

Decision will be entered for respondent.


author: Hakron:

text:
    Henry M. Lucas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100516.
    Promulgated April 18, 1941.

      A. O. Dickey, Esq., for the petitioner.

      Homer J. Fisher, Esq., for the respondent.
   OPINION.

Hakron:

The sole question is whether in the taxable years petitioner is taxable on all or any part of the income of the so-called alimony trust created by him for the benefit of his divorced wife, Maud L. Lucas. On his income tax returns for the taxable years petitioner did not include in gross income any part of the income of the trust. On the statement attached to the deficiency notice respondent determined that the income of the trust should be included in the petitioner’s gross income in the taxable years.

A taxpayer is taxable on the amounts distributed to his divorced wife under a so-called alimony trust which is “merely security for a continuing obligation of the taxpayer to support his divorced wife.” Douglas v. Willcuts, 296 U. S. 1. However, a taxpayer is not taxable on the amounts distributed to his divorced wife under a so-called alimony trust where local law and the trust have given the taxpayer “pro tanto a full discharge from his duty to support his divorced wife and leave no continuing obligation, contingent or otherwise.” Hel vering v. Fuller, 310 U. S. 69. The taxpayer has the “burden, of establishing not by mere inference and conjecture but by ‘clear and convincing proof’ that local law and the alimony trust have given him a full discharge.” Helvering v. Fitch, 309 U. S. 149; Helvering v. Leonard, 310 U. S. 80.

In our opinion petitioner has established by clear and convincing proof that the law of Ohio (the local law) and the so-called alimony trust have given him a full discharge from his duty to support his divorced wife. The so-called alimony trust was created by petitioner in accordance with the separation agreement entered into between him and Maud L. Lucas. In the separation agreement Maud L. Lucas released petitioner “from all obligation of future support” and agreed that the sums paid to her and for her benefit were to be “in full satisfaction and settlement ■ of all claims and demands for alimony.” In the divorce decree the Court of Common Pleas affirmed the separation agreement (to,which was attached a copy of the so-called alimony trust agreement) and ordered that the agreement was to “stand in lieu of any decree for alimony prayed for by petitioner.” The Ohio court retained no power to modify the divorce decree. Under Ohio law “where the terms of a decree as to alimony are fixed by the court pursuant to an agreement of the parties they are not subject to modification.” Law v. Law, 64 Ohio St. 369; 60 N. E. 560. In his brief respondent does not contend otherwise. No power to modify the divorce decree was reserved in the decree or in the agreement affirmed by the decree. Cf. Helvering v. Fuller, supra. Furthermore, petitioner did not “underwrite the principal or income from the trust or make any commitments, contingent or otherwise, respecting them.” Compare Helvering v. Fuller, supra, with Douglas v. Willcuts, supra, and Helvering v. Leonard, supra. Moreover, petitioner irrevocably alienated the trust corpus and retained no participation in the trust income. Cf. Douglas v. Willcuts, supra; Helvering v. Fitch, supra. The conclusion is inescapable that the law of Ohio and the so-called alimony trust have given petitioner “a full discharge from his duty to support his divorced wife and leave no continuing obligation, contingent or otherwise.” Helvering v. Fuller, supra.

In his brief respondent contends that petitioner has failed to establish that Ohio law and the so-called alimony trust have given him a full discharge, because under Ohio law the divorce decree of the Court of Common Pleas was appealable. This contention is without merit. Under Ohio law decrees of the Court of Common Pleas are appealable to the Court of Appeals (Ohio Constitution, art. IV, sec. 6) and appeals to the Court of Appeals must be perfected within twenty days after entry of the decree (Ohio General Code, sec. 12223-7). The divorce decree of the Court of Common Pleas was entered on October 29, 1925. The parties have stipulated that the divorce decree has not been “vacated, overruled, revised or modified, and is in full force and effect.” It is clear that in the taxable years the divorce decree was not appealable.

Accordingly, it is held that in the taxable years petitioner is not taxable on any of the income of the so-called alimony trust. Helvering v. Fuller, supra.

Decision will be entered wnder Bule 50.

       See also Petersine v. Thomas, 28 Ohio St. 596; Olney v. Watts, 43 Ohio St. 499; Julier v. Julier, 62 Ohio St. 99; 56 N. E. 661; Hassaurek v. Markbreit, 68 Ohio St. 554; 67 N. E. 1066; Connolly v. Connolly, 16 Ohio App. 92; Kettenring v. Kettenring, 29 Ohio App. 62; 163 N. E. 43; Folz v. Folz, 42 Ohio App. 135; 181 N. E. 658; Sargent v. Sargent, 11 Ohio Dec. 218; 8 N. P. 238; Jones v. Jones, 31 Ohio L. R. 253; Heimberger v. Joseph, 55 Fed. (2d) 171.


author: Van Fossan :

text:
    Kena, Inc., Successor by Merger to Wydelke, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100406.
    Promulgated April 18, 1941.

      Charles W. Crawford, Esq., for the petitioner.

      John B. "Wheeler, Esq., for the respondent.
   OPINION.

Van Fossan :

The respondent has pitched his entire argument on the interpretation of the word “interest” as used in section 351 (b) (1) (!A). The petitioner contends that the sum received by it pursuant to the contract with deMauriac was not interest and did not represent “gains from the sale of stock or securities.” If such payment is determined to be either interest or gains from the sale of stock or securities, the section automatically applies to the situation before us since the facts of the case bring it within the provisions of the other subsection (section 351 (b) (1) (B)). It is to be noted that, while counsel for petitioner contends the payment was not interest or gains from the sale of stock or securities, he does not venture to suggest an alternative characterization or name.

It is axiomatic that the language used to describe a thing does not determine its character. The contract of December 13, 1932, denominated the amount to be paid to the petitioner as “an additional sum in lieu of interest.” The word “lieu” means “place or stead.” It does not imply that the character of the payment was different from interest but indicates that the method of computation was not in accord with the usual method of computing interest, the percentage of profit being employed as a substitute. The contract itself must be examined to determine whether the sum so designated was actual interest or was something else.

Funk & Wagnalls New Standard Dictionary defines interest as “Payment for the use of money, or money so paid; an agreed or statutory compensation accruing to a creditor during the time that a loan or debt remains unpaid, reckoned usually as a yearly percentage of the sum owed.”

In Old Colony Railroad Co. v. Commissioner, 284 U. S. 552, the Supreme Court ¡stated:

And as respects “interest”, the usual import of the term is the amount which one has contracted to pay for the use of borrowed money. He who pays and he who receives payment of the stipulated amount conceives that the whole is Interest. * * * We cannot believe that Congress used the word having in mind any concept other than the usual, ordinarily, and everyday meaning of the term * * *.

In Elverson Corporation, 40 B. T. A. 615, we said:

* * * Interest, as generally understood, means simply the “compensation allowed by law, or fixed by the parties, for the use or forbearance of money, or as damages for its detention”; “the compensation which is paid by the borrower of money to the lender for its use”; “the price or rate of premium per unit of time, paid by the borrower of money to the lender for its use.” 33 Corpus Juris 178; Joseph W. Bettendorf, 3 B. T. A. 378, 383; Bouvier’s Law Dictionary; Webster’s New International Dictionary; Anderson & Co., 6 B. T. A. 713, 716. “The usual import of the term is the amount which one has contracted to pay for the use of borrowed money.” Old Colony Railroad Co. v. Commissioner, 284 U. S. 552, 560. Congress apparently used the word in its usual and commonly accepted sense, DeGanay v. Lederer, 250 U. S. 376, and there is nothing in the legislative history to indicate that it was to be construed otherwise. Avery v. Commissioner, 292 U. S. 210. (See Report No. 704, Ways and Means Committee, 73d Cong. 2d sess., p. 11, and Report No. 558, Senate Finance Committee, pp. 13,16.) * * ⅜.

See also Fall River Electric Light Co., 23 B. T. A. 168, and cases there cited.

The contract called the amount delivered to deMauriac a loan and deMauriac acknowledged its receipt as such. DeMauriac promised to repay the loan on a definite date, December 1, 1933. He agreed to pay to the petitioner “in lieu of interest” a sum equal to 80 percent of the net profits of his business earned during the term of the loan. The contract ¡specifically designated the relationship between the petitioner and deMauriac as that of creditor and debtor and meticulously provided that only the principal amount should be repaid and and that the petitioner should share no losses of the business.

The record convinces us that the amount originally delivered to de-Mauriac and the amount subsequently advanced under the extended agreement were loans of cash made by the petitioner to deMauriac. The amounts paid for the use of such borrowed money were interest thereon.

It is not essential that interest be computed at a stated rate, but only that a sum definitely ascertainable shall be paid for the use of borrowed money, pursuant to the agreement of the lender and borrower. Except for the usury laws of the several states, there is no limit set upon the amount of interest which may be paid under specific contract between the creditor and the debtor. 30 American Jurisprudence, §5, p. 9; Edgar B. Terrell, 7 B. T. A. 773; Barker v. Magruder, 68 App. D. C. 211; 95 Fed. (2d) 122; Barker v. Receivers, 88 Ct. Cls. 468; see United States v. Sullivan, 274 U. S. 259; and Jones Syndicate v. Commissioner, 23 Fed. (2d) 833.

The lender may forego interest if he chooses. He may agree not to charge interest or to reduce the amount of interest, provided certain events occur. That situation would exist here if deMauriac had made no profits. The possibility that no interest might be payable does not affect the character of the interest when actually paid.

Here the amount in controversy was paid for the use of the primary loan as augmented by additional loan,s made under the same contractual terms. Consequently, the petitioner derived at least 80 percent of its gross income from interest and is a personal holding company as defined in the statute.

In view of the above holding it is unnecessary to consider whether the amount received by petitioner represented “gains from the sale of stock or securities.”

The action of the respondent, in denying the 20 percent credit in computing the petitioner’s undistributed adjusted net income subject to surtax, is sustained.

Decision will be entered for the resyondent.