author: MuRDOCK:

text:
    Charles R. Johnson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9877.
    Promulgated October 25, 1927.
    1. Capital stock of a corporation received by an individual as compensation for services rendered is taxable as income only to the extent of its fair market value at the time received.
    2. The petitioner herein, president of a corporation, in filing his individual return for the year 1920, reported at their market value certain shares of stock given to him by the corporation during the year as compensation for his services. The par value of these shares was $100 per share. The Commissioner in determining the corporation’s income-tax liability for the same year used $50 as the par value of the stock. The corporation thereupon filed a protest signed by its assistant treasurer claiming that the true par value of the stock was $100 instead of $50 which was allowed. Held, that the petitioner was not estopped from setting up the market value as distinguished from the par value in connection with his own income-tax liability.

      Henry B. Johnson, Esq., and Ralph Q. Kelly, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1920 in the amount of $5,544.15. The petitioner reported as income what he maintains was the fair market value of 269 shares of stock issued to him as compensation for services, whereas the Commissioner considered the stock to be income to the extent of its par value.
    FINDINGS OF FACT.
    The General Optical Co., Inc., was a corporation of the State of New York, having its principal office and place of business at Mt. Vernon, N. Y. From the year 1916, up to July 1, 1920, its capital stock consisted of 2,500 shares of preferred and 3,500 shares of common, each class having a par value of $100 per share. On July 1, 1920, this situation was changed in regard to the common stock by fixing its par value at $50 and giving two shares for one of the old stock. Neither common nor preferred stock was listed or traded in on any exchange. During the year 1918, the corporation became involved in financial difficulties and a meeting of its creditors was held at which they agreed to grant the corporation an extension of time for payment of its obligations on condition that the control of the voting stock should be vested in a creditors’ committee and that the board of directors should be reconstituted to contain members selected by this committee.
    Early in the year 1918 the corporation accepted the offer of the creditors’ committee and effected the required reorganization at a meeting of the board of directors and in addition, as required by the creditors, entered into an agreement on May 10, 1918, with the petitioner herein, Charles K. Johnson, appointing him president and general manager of the corporation for a term of five years from that date, with a salary of $1,000 a month, and setting forth that as further compensation for his services he was to receive 269 shares of the common stock of the company, payable when all of the following things had been done:

      (a) When the present existing indebtedness of the company shall have been paid;
    (5) When-a mortgage loan of $75,000 being rkised upon the company’s property has been repaid;

      (c) When all dividends on the preferred stock accrued and to accrue have been paid;
    (d) When all sinking fund payments for the retirement of the preferred stock of the company have been set apart.
    At that time all of the capital stock of the corporation had been issued with the exception of 279 shares of common stock still in the treasury.
    Pursuant to the agreement the petitioner became president and general manager of the corporation and largely through his efforts its financial condition was restored, and on March 29, 1920, at a meeting of the board of directors, a resolution was passed reciting the fact that the conditions as above set forth had been fulfilled and directing the vice president and secretary to deliver 269 shares of common stock to the petitioner in accordance with the agreement. The delivery of these shares was thereupon made pursuant to this resolution.
    The corporation’s return for income-tax purposes for the year 1920 was prepared by Mr. Meek, the vice president and treasurer, who had complete charge of the fiscal matters of the corporation, but it does not appear who signed and swore to this return. The corporation filed a protest with the Commissioner of Internal Revenue wherein it contended among other things that the Commissioner was in error in fixing the par value of the stock delivered to the petitioner at $50 per share, whereas, in fact the par value was $100 per share and that his disallowance of half of the latter amount, representing compensation paid to the petitioner, as a deduction from the corporate income was erroneous.
    The petitioner’s individual income-tax return for the year 1920 was made up, signed, and sworn to by the petitioner himself, and his income from the 269 shares of stock issued to him as above set forth was returned at $5,380, or a valuation of $20 per share, as the market value of the stock at that time, this market value being estimated from a report of Hemphill Noyes & Co., a firm of brokers, who had handled almost exclusively the stock issues of the corporation.
    Approximately 85 per cent of the business of the corporation consisted in the manufacture and sale of Kryptok bifocal lenses as one of three licensees under a patent expiring on May 1, 1925. The approximate profits and losses of the corporation for the years 1917 to 1925 were as follows:

      The common stock had practically no market and there was but one sale of any such stock between October, 1919, and the last of March, 1920, this sale being at a price of $20 per share. The quotations as of March, 1920, were, bid, $20; asked, $25, and these were typical of the stock during the entire period of its existence. Only one dividend was paid on the stock, that of December 2, 1920, at a rate of $2 per share.
    The amount of taxable income to the petitioner on the 269 shares of stock issued to him on March 29, 1920, as compensation for his services was $5,380.
   OPINION.

MuRDOCK:

It is well settled that capital stock of a corporation received by an individual as compensation for services rendered is taxable as income only to the extent of its fair market value at the time received. Appeal of William J. Conlen, 1 B. T. A. 472; Appeal of James R. Lister, 3 B. T. A. 475; Appeal of Roscoe H. Aldrich, 3 B. T. A. 911.

We do not understand that the respondent questions this principle, but he contends that the petitioner is estopped from setting up the fair market value for .income-tax purposes because of a return made in 1920 by the corporation of which he was president at the time, claiming the par value of the stock paid to the petitioner at $100 per share as a deduction from income and as an addition to invested capital, and because of a protest filed by the corporation to the act of the Commissioner in disallowing the deduction of $100 and fixing the par value at $50 per share. However, the corporate return was not offered in evidence, and we do not know who made it or what it contained. The protest was offered in evidence by the respondent and contains the following significant language:

(Page 6.) The taxpayer submits that the Treasury made this adjustment due to the absence of all pertinent facts and for that reason the taxpayer now submits such facts. On July 1, 1920, in accordance with the resolution of the stockholders of the General Optical Company, the par value of the common stock was changed from $100 to $50 a share and two shares of new common stock were issued in exchange for each share of old, common stock.
(Page 11.) In Exception No. 2, it is shown that the common stock paid to Mr. Chas. R.. Johnson for services rendered was of the old issue of common stock of the par value of $100 a share and not of the new issue of the par value of $50 a share. Accordingly, the value of $26,900 should he allowed in invested capital from March 31, to the end of the year (including date of change) or 276 days. 276/366ths of $26,900, equals $20,285.25.

■Therefore, it nowhere appears in the evidence that the petitioner had any connection with the corporate return or with the protest, or that the corporation has made any claim with respect to market value, its sole contention being that the Commissioner had made a mistake of fact in fixing the par value at $50, whereas, in fact, such value was $100 per share.

Thus certain essential elements of estoppel are lacking. The representation was that of the corporation and so far as the evidence goes, the petitioner had no part in the preparation of the corporate return or the protest. There was no misrepresentation of fact and there was nothing contained in the protest which was calculated to deceive the Commissioner into believing that the market value as distinguished from the par value amounted to $100 per share. Finally it has not been shown that the Commissioner in allowing the deduction from corporation income had fixed a price of $100 per share as representing the market value.

The fair market value of $20 per share was shown satisfactorily by the evidence of the only brokers who dealt in the stock and who gave the only sale among their records at the time of the transfer or within six months prior thereto, and who also gave the quotations as of the month in which this stock was transferred. This value was not inconsistent with the evidence brought before us, showing the financial condition of the company, its prospects and the number and amount of dividends paid upon the stock.

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

Considered by Trammell, MoeRis, and SieekiN.


source: Caselaw Access Project

author: Murdock :

license: Public Domain

text:
    Tel-Electric Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6662.
    Promulgated October 25, 1927.
    Commissioner’s valuation of inventories approved for lack of evidence.

      Camden R. McAtee, Esq., for the petitioner.

      Jos. K. Moyer, Esq., for the respondent.
    The deficiency is of income taxes for the calendar year 1920 in the amount of $897.27. An allegation of error is that the Commissioner used a closing inventory of 1920 which contained two errors, some wire being inventoried at cost, whereas market was lower, and some ice machines being inventoried at cost, whereas they were valuable only as junk. Other errors were alleged, but were admittedly not supported by any competent evidence.

      FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of the State of Texas. It conducts a retail business in Houston, selling electrical supplies.
    Its inventories were made on the basis of cost or market, whichever was lower.
    Its method of taking its closing inventory for 1920 was as follows:
    All items of merchandise in stock were counted and the description and quantity of each kind of merchandise was written on a stock card. These stock cards were then assembled and from them the department head made an original and a carbon duplicate list showing the quantity and description of each. The carbon duplicate list was kept by the department and the original was sent to the main office where the purchasing department extended each item to show its cost or market value whichever was lower, and this list then represented the inventory. In making these extensions use was made of so-called purchase cards, which showed the name of the manufacturer from whom goods had been received, the date received, the amount received and the cost. The entries on these cards were usually made when the goods were- received. If after goods were received there was a revised price received from the manufacturer the revised price was not always entered on the card.
    The original inventory sheets of the closing inventory of 1920 have been lost. The following entries appear on the carbon duplicates:
    “ 98021 ft 14 Bx 2 Cable ”
    “ 8 Small Size Isko Ice Machines ”
    The purchase card for the cable shows that the last purchase in 1920 was made on September 20, 1920, 30,000 feet, at a net cost of $191.16 per thousand feet. It shows no revised price from that date to the end of the year.
    From December 17, 1920, to January 3, 1921, the Youngstown Sheet & Tube Co., from whom the petitioner had purchased some of its “ 14 Bx 2 Cable,” quoted this type of cable at $60 per thousand feet f. o. b. Pittsburgh.
    The purchase card for the Isko ice machines had been lost, but the invoice records show that 8 small machines cost $2,163.20. This type of machine was impractical for use in the vicinity of Houston, and about the last of 1920, or the first of 1921, the petitioner gave up the sale of the machines. Any that it had sold were taken back by the petitioner, but it was unable to get the manufacturer to make any refund or adjustment on account of the failure of the machines. Some of the machines on hand on December 31, 1920, had been used, others had not. Later the petitioner sold six of these machines to an electrical contractor for $60 or $75 for the lot.

      The Commissioner accepted as correct the inventory for the close of the year as shown by the revenue agent’s report.
   OPINION.

Murdock :

In making its income report for the year 1920, the petitioner, of course, used its closing inventories for that year. The sheets of paper on which this inventory was written out have now been lost. The petitioner contends that in this inventory a quantity of wire was included at cost, when, as a matter of fact, the market value of the wire was less than cost. It further contends that the Commissioner has not changed this inventory, and that therefore there is an error in the Commissioner’s computation. It makes the same contention in regard to eight Isleo machines. We have no positive evidence of the figures at which the wire and the Isko machines were entered on the inventory. The evidence upon which the petitioner relies to prove its contentions is largely circumstantial and the petitioner asks us to draw certain inferences from this circumstantial evidence to support its contention.

The petitioner’s contention may be stated somewhat syllogistically as follows:

Market value of this cable was less than cost.

My inventory values have always been taken from my purchase cards alone. These cards always show cost and if I know that market differs from cost they also show market. The purchase card for this wire cable shows only cost. Therefore I did not know that market was lower and I must have used cost in my inventory. Cost being used in my inventory was also reflected in my return. The revenue agent corrected neither my inventory nor my return, because the inventory sheet was lost before he came to examine my records and I was not able to convince him of my error. The Commissioner admits that the inventory as shown in the revenue agent’s report has been accepted as correct. Therefore, the Commissioner’s determination is erroneous because it involves an inventory taken at cost when market was lower.

The logic of this reasoning fails if the alleged facts are not facts. Is it a fact that the purchase cards always showed market as well as cost when the petitioner knew that market differed from cost and that inventory values were dependent entirely on what these cards showed? If the cards only showed cost, then any market values entered on the inventory must have gotten on in some other way and the petitioner’s reasoning fails completely.

On this point let us examine the testimony of the petitioner’s witness, Boyle. He and Miller made some of the extensions in the closing inventory of 1920, but Boyle was unable to say whether cost or market had been used in connection with this wire cable and the Isko machines. In trying to show that when a revised price list was received the revised price which would indicate market was entered on the purchase card, the following question was asked Mr. Boyle and he gave the following answer:

Q. Was there ever any change made in that purchase card as to the purchase price of the goods? If you got a revised list, did you make any change on the purchase card? Did you make any entry or change on the purchase card?
A. No, there was no entry made except when a new consignment of merchandise was purchased at that time.

He testified further on direct examination:

Q. Now, with reference to this cable wire, you said that, first said that the red ink on the cost card would indicate the inventory value. You later corrected that. Can you take this cost card and tell what was the inventory value of those goods for the year 1920?
A. You can tell from that cost card there, if the card was used to take the value, yes.
Q. Do you know whether in fact the cost card price was used as the inventory value of the cable wire on December, 1920, December 31st, 1920?
A. I can’t say definitely, because it doesn’t show there that it is.
Q. Was it the rule to take as the inventory value the cost price as shown by the purchase card, unless you had some other instructions to do otherwise?
A. Yes, sir.
Q. Do you recall whether you had any other instructions to do otherwise with reference to this particular cable wire?
A. I recall the fact that Mr. Miller, who was then General Manager oí the Tel-Electric Company, and who is now located with the H. C. Roberts Electric Supply Company of Philadelphia, didn’t want to show the actual market value as per the great reduction, on account of the extremely great loss that would be involved when that inventory was taken.

Such testimony leads us to believe that the inventory values were not entirely dependent upon the entries on these purchase cards, but that these cards only showed cost. Therefore the petitioner’s reasoning fails because we now have nothing to indicate what was used as the inventory value of the items in controversy.

The purchase card for the Isko machines was lost after the inventory was taken and we do not know what it showed. Furthermore we have no way of inferring what amount might have been entered on the inventory as the value of these machines.

We have serious doubts about the existence of other alleged facts necessary to reach the petitioner’s conclusion; consequently, we affirm the Commissioner without expressing any opinion on the merits of the petitioner’s reasoning.

Judgment will ~be entered for the respondent.

Considered by Morris, Siefkin, and Trammell,


author: MuRdock:

text:
    Sterling Realty Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6333.
    Promulgated October 25, 1927.
    Tbe Marcli 1,1913, fair market value of real estate determined.

      J. S. Finlayson, Esq., and Paul D. Rogers, Esq., for the petitioner.

      L. 0. Mitchell, Esq., for the respondent.
    This is an appeal from the determination of deficiencies in income and excess-profits taxes for the years 1919 and 1920 in the sum of $15,617.77, which arose from the refusal of the Commissioner to accept the March, 1913, valuation as returned by the petitioner upon certain real property sold in 1919 and 1920.
    FINDINGS OF FACT.
    The petitioner is a Nebraska corporation with its principal office in the City of Omaha, and was formed for the purpose of holding certain vacant real estate in the City of Omaha, known as the E. Kountz Reserve, previously owned by the heirs of Mrs. Elizabeth Kountz. This property, so held by the petitioner, extended about three city blocks east and west, from 17th to 20th Streets, and two blocks north and south from Harney Street to St. Mary’s Avenue, and was part of the so-called St. Mary’s Avenue District. In 1919, the petitioner sold for a total consideration of $182,500, the following lots in the E. Kountz Reserve: Lots 1, 2, 8, 9, 17, 18, 24, 26, 27, 28, 29, 49, 50, 51, and 52 in Block 3, the East 75 feet of Lots 1, 2, and 3 in Block 2, and Lot 6 in Block 1. In 1920, the corporation sold for a total consideration of $72,500, Lots 10 and 16 in Block 3, and Lot 6 in Block 2. The petitioner estimated the March 1, 1913, fair market value of the lots sold in 1919, at $160,000, and in its income-tax return for that year reported a profit of $22,500. For the lots sold in 1920, the petitioner estimated the March 1, 1913, fair market value to be $62,500, and reported a profit for 1920 of $10,000,. The Commissioner refused to accept the valuation of the petitioner and fixed the March 1, 1913, value of the lots sold in 1919 at $114,062.50 and of the lots sold in 1920 at $41,428.60.
    Although the E. Kountz Reserve was located but a short distance from the business center of Omaha, the property had remained in a dormant and inactive state for some years prior to and after March 1, 1913, due to the fact that the streets and sidewalks were badly paved and that near 17th Street and St. Mary’s Avenue, due to the grades, a pocket had been formed which was flooded by each heavy rain. There was in addition an obstruction in'the neighborhood of 17th and Howard Streets, which had caused this part to be shunned by traffic and had hindered the development of the whole district. These conditions had been in existence for many years and although there had been frequent agitation for improvements, none were undertaken until about 1917, when an improvement district was created by the City Council of Omaha; the project failed at this time and a new improvement district was created in November or December, 1920; the actual work, however, was not begun until 1921 and finished in 1922, at which time the streets were repaved and widened, the grades reduced to some extent and the drainage corrected, thus eliminating the former flood condition of this district.
    The period just after the termination of the World War in 1919 and 1920 was one of great activity and business expansion in Omaha. There was a business boom with a consequent advancement of prices, but due to the peculiar condition of the St. Mary’s Avenue District and its physical disadvantages the general increase in values affected it but slightly, if at all. There were no sales in the district during the year 1913, the nearest in point of time being that of a lot at 19th and Harney Streets, on which the Omaha Grain Exchange later constructed a building. This lot was bought in 1912 at a price of about $38,000 and sold in 1914 for $55,000. This particular property adjoined lots 1, 2, 24, and 25 in Block 3, sold by the petitioner in 1919, and its value as vacant property was approximately the same as a like number of feet of petitioner’s lots. The 1914 transaction was considered by petitioner’s experts in arriving at their opinions of March 1,1913, values. Practically no sales were made in this district until the sales here in question and none have been made since, except that one lot, No. 42, sold in 1917 for $6,500, was resold in 1921 or 1922 for $15,500.
    The county tax assessments during this period were made in 1912, 1916, and 1920, and show an increase in assessed real estate values for the district of approximately 175 per cent from 1912 to 1920. However, there was no such increase in market value.
   OPINION.

MuRdock:

No testimony was introduced as to the date of acquisition or the original cost of these properties to the petitioner and both parties concede that the only issue in this case is the March 1, 1913, value of the lots sold by the petitioner in 1919 and 1920. In order to prove such value the petitioner has relied upon the testimony of a number of real estate experts whose total valuations for the lots sold in the above years varied from $179,270 to $218,650. It has also introduced the testimony of two abstracters of title, who have arrived at their values by an analytical method, based upon a single sale in 1914, but who have disregarded a sale of the same piece of property in 1912.

The Commissioner based his determination upon a report of revenue agents who had examined the property and the tax assessments for various years from 1912 to 1920, and who had interviewed certain real estate agents of the city. We do not know who these real estate agents were except that it appears that two were witnesses called by the petitioner. The respondent contends that the values claimed by the petitioner are erroneous for the reason that the years 1919 and 1920, when the lots in question were sold, were boom years and a period of great expansion and business activity, resulting in greatly increased prices. He bases this contention upon the testimony of the petitioner’s witnesses on cross-examination, upon various statistics introduced in evidence as to the growth of population and industries in the City of Omaha at that period, and upon the fact that a great many buildings were erected in districts nearby from 1917 to 1920. He reasons that sale prices in 1919 and 1920 therefore represented a large percentage of increase over the values as of March 1, 1913. However, a careful reading of the testimony of the petitioner’s witnesses will disclose the fact that they have stated as their opinion that such advance in prices did not affect the district in question, due to its peculiar situation and physical disadvantages, and that this was not remedied until certain improvements were carried out in 1921.

The respondent further contends .that the years 1919 and 1920 represented the peak of a rise in values for the district. In support of this he points to the fact that almost all of the petitioner’s sales were made during those years and he seeks to show that the improvements about to be made in the district caused an increase in value before these improvements were in fact carried out. However, the fact that the majority of sales were made in the two years in question does not necessarily establish that period as one of higher prices without further testimony, and, standing alone, it merely raises an inference which we are not inclined to adopt. As to the effect of contemplated improvements, the testimony of the real estate dealers called by the petitioner shows that the proposed changes were not anticipated and caused no perceptible increase in values before they were actually undertaken.

Furthermore, it appears that the property owners themselves were opposed to the contemplated changes due to their fear that the cost of the improvements might outweigh any increase in values which would result. Where such uncertainty existed as to the effects of proposed improvements, it is reasonable to suppose that no great rise in values would occur until the improvements were more definite and their cost settled.

Thus, in arriving at the values in dispute, we must decide between positive testimony introduced by the petitioner and the contention of the respondent that such values must have been considerably lower than the selling prices for the reasons above set forth. Under such circumstances we have based our determination upon the valuations as set forth in the testimony introduced by the petitioner, since we are of the opinion that the uncontradicted testimony of a number of real estate experts familiar with the properties and values as of March 1, 1913, furnishes a better basis than an arbitrary percentage of increase founded upon a general rise in prices which may or may not have affected the district in question. Consequently, we hold that the March 1, 1913, fair market value of the lots sold in 1919 amounted to $145,000 and that of the lots sold in 1920 amounted to $45,000.

Judgment will be entered upon notice of 15 days, under Rule 50.

Considered by Trammell, MoeRis, and Siefkin.


author: Smith :

text:
    Louis Wald, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4629.
    Promulgated October 25, 1927.
    On the evidence held that the income-tax return filed for the year 1919 was not fraudulent and that the petitioner is not liable to the assessment of the penalty provided by the statute for the filing of a fraudulent return. Held further, that the petitioner is liable to the assessment of the penalty for negligence provided for by section 250 (b) of the Revenue Act of 1918.

      Benjamin H. Flesher, Esq., for the petitioner.

      Joseph B. Harlacher, Esq., and J. Harry Byrne, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1919 in the amount of $148.91, plus a penalty of $74.46 for alleged fraud in filing a false return. The petitioner alleges that the Commissioner erred in determining taxable net income and also erred in assessing a 50 per cent penalty.
    FINDINGS OF FACT. '
    The petitioner is an individual engaged in the retail women’s ready-to-wear clothing and fur business in Aberdeen, S. Dak. The books of the business were not kept in accordance with either the double or the single-entry method of bookkeeping. Entries therein were made principally by petitioner’s wife, who had no experience in keeping a regular set of books. Such entries were usually made in the evenings at petitioner’s residence and were based on information supplied by him to his wife. In a few instances entries were made by petitioner.
    The returns of petitioner for a number of years were prepared in Minneapolis, Minn., by his sister-in-law, an attorney of that city, from figures submitted to her by her sister, the petitioner’s wife, and he signed the filled-out forms returned to him by his sister-in-law. A return which had been prepared in this manner and which disclosed no tax liability, was filed for the year 1919, the petitioner taking no part in the preparation thereof.
    A revenue agent examined the accounts of the petitioner in 1923. In computing net income he discarded the data contained in the books and took as gross sales the total amount of petitioner’s bank deposits. He then ascertained the allowable deductions and goods purchased from canceled checks and computed cost of goods sold by the use of inventories. This method of computing petitioner’s net income resulted in the disclosure of a net income for the year 1919 in the amount of $9,116.74.
    As a result of the revenue agent’s investigation, the Commissioner made a jeopardy assessment in December, 1923, of an additional tax and a 50 per cent fraud penalty. The total assessment for the year 1919 amounted to $444.84 tax and $222.42 penalty. The petitioner filed a claim for the abatement of the additional tax and penalty on February 21, 1924. He also filed an amended return for the year 1919. After the claim for abatement and the amended return were filed, the petitioner’s accounts were again examined by the same revenue agent, who recomputed net income for the year 1919 by adding the amount of the net income appearing on the amended return filed for that year to the $9,116.74 which he found at the time of his first investigation. The Commissioner adopted the findings contained in the revenue agent’s report of the second examination and he now proposes to make an additional assessment for the year 1919 of $148.91 tax and $74.46 penalty.
    After the petitioner filed the abatement claim and the amended return he employed a firm of accountants to make an examination of his accounts. In making this examination, the accountants also disregarded the data found in the books and computed net profit by taking total bank deposits as representing sales; ascertained business expenses and goods purchased from canceled checks; and employed inventories in determining cost of goods sold. The figures obtained by the accountants differed in some particulars from those obtained by the revenue agent as a result of his first examination, but the net profit of $9,104.34- found by the accountants closely approximated the net income originally found by the revenue agent.
   OPINION.

Smith :

The notice from which this appeal was taken is dated April 8,1925, and it states in paragraphs (1) and (2) that—

An examination of yonr income tax returns for the years 1918 to 1921, inclusive, has been made and the results thereof are outlined in the attached statement.
The right of appeal provided in the following paragraphs does not apply to the years 1918, 1920, and 1921, inasmuch as the overassessments for those years results from assessments made prior to June 2, 1924, the effective date of the Revenue Act of 1924.

The petition initiating this proceeding which was filed on June 8, 1925, refers to the deficiency letter and states the taxable year and amount of tax involved in paragraphs (2) and (3), respectively, as follows:

(2) The deficiency letter (a copy of which is attached) was mailed to the taxpayer on April 8, 1925 and states a deficiency for Louis Wald for the years 1919 of $223.37.
(3) The taxes in controversy are income taxes for the calendar year ended December 31, 1919 and is less than $10,000.00, to wit: — $223.37.

At the hearing, petitioner’s counsel moved that the Board allow an oral amendment of the petition so as to include therein each of the years mentioned in the deficiency letter. In support of this motion he argued that the same questions were involved for each of those years; that none of the additional taxes assessed had been paid; and that the Board should take jurisdiction of the whole controversy between the petitioner and the respondent despite the statement of the latter that no right of appeal existed with respect to the years 1918, 1920, and 1921, which, he claimed, was relied on and which constituted the only reason why the petition filed June 3, 1925, did not specifically set out the taxes for 1918, 1920, and 1921 as being in controversy.

The statement which was attached to, and became part of, the deficiency letter of April 8, 1925, and which set out the tax computations for each of the years 1918 to 1921, inclusive, was not attached to and made a part of the petition. Counsel for respondent exhibited a copy of the statement at the hearing, but it was not offered in evidence nor was it offered for the purpose of amending the petition. No appeal with respect to the years 1918, 1920, and 1921 having been filed with the Board within the 60-day period required by the statute, we are without jurisdiction to consider an appeal covering those years.

The issues before us relating to the year 1919 are (1) whether the Commissioner correctly determined taxable net income, and (2) whether or not the petitioner filed a false and fraudulent return with intent to evade tax.

The evidence convinces us that, while the petitioner’s return was incorrect, he was innocent of any fraud when he signed and verified it, and we are of the opinion that no fraud penalty can be assessed or collected from him. We are of the opinion, however, that the nondisclosure of tax liability on the original return for the year 1919 was due to negligence on the part of the petitioner, and the motion of counsel for respondent made at the hearing of this appeal that he be adjudged liable to the imposition of a penalty of 5 per cent under the provisions of section 250(b) of the Revenue Act of 1918, is granted. Appeal of American Packing Co., 3 B. T. A. 195. See also Appeal of Excelsior Motor Manufacturing & Supply Co., 5 B. T. A. 582.

The testimony adduced at the hearing shows conclusively that the books kept by the petitioner do not clearly reflect his income. They were discarded by both the revenue agent and the accountants employed by the petitioner as sources from which his income could be ascertained. It is significant that the revenue agent in his original, examination and the accountants employed by the petitioner used the same method and utilized the same sources of information in their independent computations of petitioner’s net income. Although some differences existed in the intermediate figures obtained by them, there was only a negligible difference in the net result. This difference was not sufficiently large to convince us that the Commissioner erred in assessing a tax in the amount of $444.84 for the year 1919. We are not convinced, however, that the Commissioner was justified in proposing the assessment of an additional tax for that year, based on the arbitrary method employed by the revenue agent in his second computation of petitioner’s net income.

In view of what has been said, we are of the opinion that the petitioner’s income-tax liability for the year 1919 amounts to $444.84, plus the penalty for negligence provided for by section 250(b) of the Revenue Act of 1918.

Judgment will be entered on 20 days’ notice, under Rule 50.

Considered by Littleton, Love, and Tetjssell.


text:
    Leighton Brothers Printing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10329.
    Promulgated October 25, 1927.
    The petitioner’s president was paid a salary of $14,400 for the calendar year 1920. Held, that the total amount was a legal deduction from gross income as ordinary and necessary expenses.

      W. Yale Smiley, Esq., for the petitioner.

      James A. O’Oallagkm., Asgi, for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits tax for the calendar year 1920 in the amount of $1,990.94. In the determination of the deficiency the Commissioner disallowed the deduction of $7,400 of a total amount of $14,400 paid as salary to the petitioner’s president.
    BINDINGS OB BACT.
    The petitioner is a Minnesota corporation with its place of business at Minneapolis. It was incorporated in 1918 and was the successor of a partnership engaged in the job-printing business. On January 1, 1920, the capital stock outstanding was $17,500. Early in the year 1920 an additional $1,000 capital stock was sold for $500. George A. Leighton was the president of the corporation and owned $12,000 capital stock. The other stockholders consisted of H. N. Leighton and E. E. Leighton, brothers of George A. Leighton, and C. A. Leighton, son of George A. Leighton. Each of the brothers owned $2,000 capital stock and the balance was owned by the son, C. A. Leighton.
    George A. Leighton, the president, was responsible for the success of the business. He had been in the printing business in Minneapolis for many years prior to 1920 and he was the business getter for the corporation. He was paid a salary of $7,000 a year for 1918 and 1919. The corporation had accumulated a considerable surplus during these two years, a part of which was invested in Liberty bonds and other securities which were held by George A. Leighton for the benefit of the corporation. They were actually in his control and possession from the time of acquisition. The directors of the corporation met about once a week and informally discussed the business of the corporation and took corporate action with respect to the affairs of the corporation. The minutes of such meetings were never written up. At one of these informal meetings held in October or early in November, 1920, the directors agreed that the salary of George A. Leighton, which had theretofore been fixed by the corporation for the year 1920 at $7,200, should be doubled for that year and that he should be paid a salary of $14,400. It was further agreed that the increase in salary should be paid out of the securities then held by George A. Leighton as president. This amount, $14,400, was no more than reasonable compensation for the services actually rendered to the corporation by the president in 1920.
    The books of account of the corporation show that there was credited to George A. Leighton monthly during 1920, $583.33. At the close of the year there was also credited to the president as salary additional amounts to make his total compensation for the year $14,400. At a formal meeting of the board of directors held on January 11, 1921, a resolution was formally adopted that the president’s salary for 1920 should be the amount of $14,400. A part of this compensation had been drawn by the president in irregular amounts. He drew his compensation as he needed it during the year. The books of account at the end of the year showed an amount still due the officers of the company of $6,000.
    In his personal income-tax return for 1920 George A. Leighton reported as salary paid him by the corporation in 1920, $14,400.
    The corporation return filed for the year 1920 showed a net income after the deduction of the increased salary of the president of $2,605.63.
    The petitioner paid a 10 per cent dividend upon its stock for the years 1919, 1920, and 1921.
    The amount of salary paid to the president for the year 1921 was $7,200.
   OPINION.

Smith :

The only questions for the determination of the Board in this proceeding are the reasonableness of the salary paid to the president for the year 1920, and whether such amount was an ordinary and necessary expense of the business..

We are of the opinion from a consideration of the entire evidence that both of these questions must be answered in the affirmative.

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

Considered by Littleton, Love, and Teussell.


author: Love:

text:
    Indiana Stove Works, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8148.
    Promulgated October 25, 1927.
    1. A deduction claimed on account of alleged ordinary and usual repairs to certain buildings disallowed since the evidence fails to establish the items classed as repairs and the cost thereof.
    2. Petitioner’s invested capital may not be reduced by assuming and deducting from available earnings for 1920, an obligation to pay a tentative tax for that year, thereby reducing the amount of earnings available for the payment of dividends. Appeal of L. S. Ayers & Go., 1 B. T. A. 1185.

      John E. McClure, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    • This proceeding is for the redetermination of a deficiency in income and profits tax for the calendar year 1920 in the amount of $1,073,28. The petitioner alleges that in determining the deficiency herein, the respondent erred in the following particulars:
    In disallowing as a deduction from gross income the amount of $3,897.67 alleged to represent ordinary and necessary expense incurred in making repairs to the petitioner’s office, warehouses, and stable.
    In reducing the amount of the 1920 earnings available for the payment of dividends by a tentative income and excess-profits tax for 1920 in the amount of $5,281.97, thereby reducing the petitioner’s invested capital.
    FINDINGS OF FACT.
    The petitioner is an Indiana corporation with its principal office at Evansville, Ind.
    During the year 1920, the petitioner entered into a contract with one Nellis for performing certain work in connection with the repairing, altering, and remodeling of its office, warehouses, and stables. The contract price for the work to be performed was $6,200. After the work had started, the amount of $367.62 was expended for extras, making a total expenditure of $6,567.62.
    The interior arrangement of the office was materially changed. Partitions were moved into new positions and new ones installed. The entire office was replastered and changes made in some of its windows and doors. Some new heating and lighting equipment was installed. The floor was covered with a substance designed to remedy the defects due to the removal of the partitions and additional toilet facilities were installed.
    Two warehouses were connected and, due to rotten joists, the floors thereof were raised. New openings were made in the stable so that it could be used as a garage.
    Of the amount of $6,567.62 expended for the work performed, the petitioner capitalized $2,669.95 and the balance of $3,897.67 was charged to expense. The segregation of the respective amounts to capital and expense was made by George J. Zurstadt, petitioner’s vice president, who, before he became connected with the petitioner in 1902, had been in the lumber business. Zurstadt in arriving at the amount to be charged to expense, deducted from the total amount expended an amount which was his estimate, after consultation with the contractor, of the fair valuation of those items which, in his opinion, constituted capital expenditures. The items which he decided should be capitalized and his valuation thereof were:
    Plastering- $246.00
    Rough lumber_ 491.10
    Finish lumber- 320. 00
    Plumbing and beating---1, 516. 85
    Electric fixtures_ 96. 00
    2, 669.95

      The amounts actually expended for those items which Zurstadt determined should be capitalized are not disclosed; neither are the amounts expended for each of the items which by the process of elimination were classed as ordinary and necessary repairs.
    The petitioner’s available earnings for the year 1920 amounted to $38,745.94. On March 9, 1920, and June 15, 1920, dividends were declared in the amounts of $11,445 and $9,537.50, respectively.
    Upon audit of the petitioner’s return, the Commissioner reduced the available earnings for 1920 by assuming and deducting therefrom tentative income and profits taxes for 1920 in the sum of $5,281.97, which action resulted in reducing the amount of earnings available for dividends on the dates they were declared, thereby reducing the invested capital.
    The Commissioner also disallowed as a deduction from gross income the amount of $3,897.67 claimed as an ordinary and necessary expense for alleged repairs.
   OPINION.

Love:

The petitioner takes the position that since the contract in question covered both capital and expense items, segregation of those items was its right under the statute, and the segregation made by Zurstadt, its vice president, should be accepted until found to be erroneous. We are unable to agree with this contention. It will suffice to say that the Commissioner having disallowed the deduction claimed on account of repairs, the burden is on the petitioner to show that he erred if we are to allow the deduction.

It is probable that some of the expenditures made pursuant to the contract and disallowed as deductions by the Commissioner were for ordinary and necessary repairs, the cost of which is deductible. Appeal of Illinois Merchants Trust Co., Executor, 4 B. T. A. 103. But in order that we may allow a deduction on account thereof, we must be apprised of those items constituting repairs, and also of their cost.

The petitioner urges that all items not capitalized must necessarily be items of repair. That would unquestionably follow if we were to assume that Zurstadt had been unerring in his determination with respect to the proper allocation of the disputed items. The evidence, however, indicates that practically all of the items in controversy were additions and replacements and had a life of several years.

In view of the fact, therefore, that neither the items classed as repairs nor the cost thereof are disclosed by the record, we can only approve the respondent’s determination in disallowing the deduction claimed on account thereof. Appeal of Modesto Lumber Co., 5 B. T. A. 598.

The petitioner’s contention that the respondent erred in reducing its invested capital by assuming and deducting from available earnings for 1920, an obligation to pay a tentative tax for the year 1920, which resulted in reducing the amount of earnings available for dividends, is sustained. See Appeal of L. S. Ayers & Co., 1 B. T. A. 1135, and upon that authority we disapprove the respondent’s determination in regard thereto.

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

Considered by Tktxssell and Smith.


author: 'MuRdock:

text:
    Bessemer Investment Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5295.
    Promulgated October 25, 1927.
    1. A transaction in regard to stock of Standard Oil Co. of New York, beld to have resulted in no profit to the petitioner.
    2. The Commissioner’s determination that certain transactions in regard to stock of New England Co. resulted in profitable sales by the petitioner approved for lack of evidence to the contrary.
    3. The Commissioner’s determination of the value for purposes of depreciation allowances of certain buildings of Henry Phipps Estates approved for lack of evidence of any other value.
    4. Commissioner’s determination of a gain from the sale of certain improved properties approved for lack of evidence.

      Bernhard Knollenberg, Esq., and Ohmies G. Parlin, Esq., for the petitioner.

      J. Arthwr Adams, Esq., for the respondent.
    The Bessemer Investment Co. has petitioned for a redetermination of deficiencies in its income and profits taxes for the calendar years 1918 and 1919, in the respective amounts of $11,281.02 and $29,124.55. The former resulted from the rejection of a claim in abatement. That the petitioner is affiliated with Henry Phipps Estates and La Salle, Inc., is not disputed by either party.
    The petitioner alleges that the Commissioner erred (1) in determining that income in the amount of $100,000 resulted from the purchase by the Bessemer Investment Co. of bonds of La Salle, Inc., at less than the amount at which they were issued; (2) in construing a transaction which took place in 1918 in regard to some stock of the Standard Oil Co. of New York, as a profitable sale by the Bessemer Investment Co., which transaction was in fact entered upon its books by mistake; (8) in taking less than the fair market value of certain buildings of the Henry Phipps Estates in the computation of a deduction for 1918 and 1919 under section 234(a) (7) of the Revenue Act of 1918, thereby decreasing the deduction; (4) in reducing the amount of a deductible loss sustained by the Bessemer Investment Co. from the sale of securities in 1919, by allowing a loss of only $6,112.75 on the sale of some Kennicott Copper stock, when, as a matter of fact, the loss should have been $7,112.75; and by construing as a profitable sale of 1919, certain transactions of the Bessemer Investment Co. in regard to purchases and assignments of common stock of the New England Co., and (5) in determining that the Henry Phipps Estates realized a profit of $279,241.80 from the sale in 1919 of two parcels of improved real estate, whereas a deductible loss of $89,497.78 should have been allowed.
    The respondent admitted at the hearing that the contention of the petitioner was correct in regard to his first allegation of error and in regard to the loss sustained upon the sale of the Kennicott Copper stock.
    FINDINGS OF FACT.
    The Bessemer Investment Co. during 1918 and 1919 was a corporation organized under the laws of the State of New Jersey. Its principal office was in Hoboken, N. J.
    . In his computation of a deductible loss of $1,509.84 sustained by the Bessemer Investment Co. from the sale of securities, the Commissioner included $14,448 as a profit from the sale of 100 shares of stock of the Standard Oil Co. of New York.
    The Bessemer Investment Co. was advised by its brokers on May 24, 1918, that on the previous day 50 shares of Standard Oil Co. of New York stock had been purchased for its account for $13,753.13 and that this stock had been sold for $13,794.87. This transaction, which showed a profit of $41.74, was entered on the books of the Bessemer Investment Co. On May 31,1918, the same brokers notified the company by letter that the previous report had been in error, that the stock had been purchased for another customer, and that the profit should be returned. The company thereupon repaid the profit by its check and made appropriate entries on its books to reverse the previous entries. During 1918, the Bessemer Investment Co. made no sale of Standard Oil of New York stock which resulted in any profit.
    In his computation of a deductible loss of $59,197.35, sustained by the Bessemer Investment Co. in 1919, on account of the sale of securities, the Commissioner included $15,841.06 as a profit from the sale of 428.2 shares of New England Co. common stock.

      On page 69 of Ledger No. 1 of the Bessemer Investment Co. there appears an account entitled “New England Co. Common. Stock.” The first entry under this account is dated June 30,1915, and the last is dated July 1, 1919. Between these dates the>account shows on various dates the debiting of numbers of shares of this stock at various prices, with a reference to the journal page in regard to each. It also shows the crediting on various dates of numbers of shares of this stock at various amounts, with a reference to the journal page in regard to each. Just above and to the right of the heading of this account there appear two pencil notations in the handwriting of a bookkeeper of the Bessemer Investment Co. who is still in its employ but who was not called as a witness. The first of these is as follows:
    Gliaee receives 25% of Purchases after
    Nov. 2nd 1917 up to 250 shs.
    The second is as follows:
    See letter D. T. M. 7/30/17.
    We agree to carry for Mr. Moore
    $10,000 worth of stock
    20% of purchases after July 30, 1917.
    The chief accountant of the Bessemer Investment Co., who entered its employ about May 1, 1918, first noticed these pencil notations about January, 1919. This account contains, inter alia, the following credit entries:

    On the journal of the Bessemer Investment Co. at page 503, there appears the following:

      The two items of interest in the respective amounts of $528.63 and $364.68, were not paid during 1919.
    In the same journal on page 507, under date of February 27, 1919, there is a debit to M. G. Chace of $26.92 and a credit to New England Co. common of $26.92, with the explanation “ %ths share at $35.89 to adjust a fraction ”; also a debit to dividends of $193 and a credit to Malcolm G. Chace of $193, with the explanation “1% of 193 shares New England Company Common,” and a further debit to dividends and a credit to D. Thomas Moore of $235.20, with the explanation “1% of 235% shares New England Company Common.” The New England Co. common stock at page 69 of Ledger No. 1 of the Bessemer Investment Co. shows a debit on June 30,1915, of 2,250 shares at $1 and another on November 1,1915, of 1,027 shares at $1. Up to and including February 27, 1919, the credits to this account show the disposition of only 1,543.2 shares of this stock.
    After November 2, 1917, and up to January 1, 1919, so far as this account shows, the Bessemer Investment Co. acquired 769 shares of New England Co. common stock at a total cost of $27,603.07, or at an average cost of $35.89 per share. After July 30, 1917, and up to January 1, 1919, so far as this account shows, the Bessemer Investment Co. acquired 1,176 shares of New England Co. common stock at a total cost of $46,707.84, or at an average cost of $39.717 per share.
    It is a common practice of the Bessemer Investment Co. to purchase stock and securities for the accounts of others. The Standard Statistics Co. of New York, in their book of security prices quotes New England Co. common at 42, on December 30,1918.
    Henry Phipps Estates, Journal No. 1, page 6, under date of January 25,1909, shows the following:
    DEBITS
    45 West 17th St. Property A/C_L. 5 162, 000.
    44 ” 18th ” ” ” L. 6 725,000.
    13 ” 21st ” ” ”_L. Ill 64,000.
    6-14 ” 22nd ” ” ” L. Ill 487,000.
    9th Ave. and 27th St. Property A/C_L. 7 170, 000.
    3 to 15 and 14 East 43rd St. ” ” _L. 8 595, 000.
    587-7th Ave. ” ” L. 9 55,000.
    1457-63 Broadway ” ” L. 10 950,000.
    West 64th St. ” ” L. 12 48,000.
    East 96th St. ” ” L. 13 233,000.
    East 102nd St. ” ” L. 14 205,000.
    3,694,000

      Properties acquired from Henry Phipps, in accordance with a resolution of Board of Directors passed at annual meeting January 12, 1909. Said properties being taken over at their tentative assessed valuation for 1909.

    The following accounts appear in Henry Phipps’ ledgers under the following headings:

      The property described as 661 to 668 Fifth Avenue was set up on the books of Henry Phipps Estates at a value of $645,000.
    For the purposes of taxation in the State of New York, the properties known as No. 44 West 18th Street and No. 45 West 17 th Street were assessed as follows:

    In a ledger of Henry Phipps Estates reserves for depreciation have been set up for the building at 45 West 17 th Street, for the period from the date of acquisition to March 1, 1913, in the amount of $4,704.76, and for the building at 44 West 18th Street for the same period in the amount of $27,971.67; for the period from March 1, 1913, to December 31, 1917, for both buildings in the amount of $114,376.45; for 1917 for the former building in the amount of $3,387.39 and for the other building in the amount of $20,139.75; for 1918, the same amount; for 11 months of 1919 for the first building in the amount of $3,105.11 and for the other building in the amount of $18,469.77.
    The Commissioner arrived at a profit from the sale of these two properties by taking the cost as shown on the corporation’s books as follows:
    45 W. 17th St_ $162,000
    44 W. 18th St_ 725,000
    - $887,000
    Less the following deductions:
    Depreciation to date of sale_
    1908 to 1915, 44 W. 18th St_ 46, 992. 75
    1909 to 1915, 45 W. 17th St_ 7, 903. 91
    1916 depreciation “ - 3,387.39
    “ 44 W. 18th St_ 20,139.75
    Total depreciation taken to Dec. 31, 1916_ 78, 423. 80
    Depreciation allowed for tax purposes, 1917_ 20, 250.00
    “ “ “ “ “ 1918_ 14,859.00
    “ “ “ “ “ 1919_ 14,859.00
    Total depreciation to be deducted from cost. 128, 391. 80
    Cost less depreciation_ 758, 608.20
    Sales price- 1,050,000
    Less Commission of_$11,100
    Documentary stamps_ 1, 050
    ■- 12,150
    -1, 037, 850. 00
    Net profit for tax purposes. 279,241.80

      Shares of stock in the Henry Phipps Estates were issued and canceled as follows:
    Issued Canceled
    May 23, 1906 98 shares to Henry Phipps_June 20, 1911
    Do 1 share to John S. Phipps_ Do
    Do — shares to George E. Gordon_ Do
    Dec. 27, 1906 2400 shares to Henry Phipps_ Do
    Jan. 25, 1909 2500 shares to Henry Phipps_ Do
    June 20, 1911 4977 shares to Bessemer Inv. Co_Dee. 20, 1924
    3 Do shares to Bessemer Inv. Go- June 20, 1911
    1 Do share to Henry Phipps_ later
    1 Jan. 9, 1917 share to Henry Phipps_Dee. 20, 1924
    1 Jan. 10, 1919 share to David P. Layman, Jr- Do
    1 Sept. 28, 1919 share to D. T. Moore_ Do
    5000 Dee. 20, 1924 shares to Phipps Realty Co- Do
    No others.
   OPINION.

'MuRdock:

The respondent has not contested the jurisdiction of the Board in this case, and has determined that the three companies were affiliated during the taxable years. We assume that for each year the facts give rise to a deficiency as defined by the statute. He has admitted that he erroneously added a profit of $100,000 to the income of the Bessemer Investment Co. for 1919, on account of the purchase by it of bonds of La Salle, Inc., an affiliated company. He further admitted an error of $1,000 in computing the loss sustained by the Bessemer Investment Co. on the sale of some stock of the Kennicott Copper Co. Both of these mistakes will be corrected upon a recomputation of the petitioner’s tax liability.

The Commissioner also erred when he determined a profit from the transaction in regard to the stock of the Standard Oil Co. of New York. Apparently he considered that the entries on the books of the Bessemer Investment Co. showed the sale of 100 shares of this stock and as the company was holding shares of this stock which it had purchased at an earlier date at a lower price, the Commissioner subtracted the purchase price from the sale price and determined that the difference was a profit. We are satisfied from the evidence that the Bessemer Investment Co. did not sell any of this stock in the year 1918, and that the Commissioner’s determination was based upon a misunderstanding of two entries in the petitioner’s books, one of which was entered by mistake and the other of which was entered intentionally to correct the mistake.

The evidence leaves us in considerable doubt in regard to the transactions in New England Co. common stock as shown by the petitioner’s boobs and we hold that the presumption of the correctness of the Commissioner’s determination has not been overcome. The petitioner contends that it had an agreement with Malcolm G. Chace whereby 25 per cent of the purchases of New England Co. common stock made by it after November 2,1917, up to 250 shares were to be purchased, not for itself, but for and on account of Mr. Chace; that thereafter it purchased 192% shares for Mr. Chace at an average price of $35.89; that it transferred these shares to Mr. Chace on J anuary 1, 1919, at $35.89; and that no gain resulted on account of this transaction. It further contends that it had an agreement with Mr. Moore whereby 20 per cent of its purchases of New England Co. common stock after July 30, 1917, up to $10,000 were purchased, not for itself, but for Mr. Moore; that on J anuary 1, 1919, it transferred 235% shares at $39.717 to Mr. Moore; that, it was merely complying with its agreement, and no profit resulted to it.

The ledger and journal of the Bessemer Investment Co. show no facts which are inconsistent with this contention, but on the other hand. the book entries, the only evidence before us on this issue, are inferential only and do not prove facts which are inconsistent with the contention of the Commissioner that there was a sale in 1919. No one has testified that the Bessemer Investment Co. or anyone acting for it had such, an agreement with Mr. Chace or with Mr. Moore. No one testified that either of these men ever entered into the agreements or ratified any acts of the Bessemer Investment Co. Were these alleged agreements written or oral? When were they made and by whom? We have in evidence a pencil notation on the Bessemer Investment Co.’s ledger. We know that it was made by the bookkeeper of the Bessemer Investment Co., but we do not know when, why, or by virtue of what authority he made it. The pencil notation of the alleged agreement with Mr. Moore refers to a letter dated July 30, 1917, in regard to which we have the testimony of one witness only, who says that he made a search for this letter in the files of the Bessemer Investment Co., but was unable to find it, and that apparently he did not apply to D. T. Moore for a copy of the letter and that an unsuccessful attempt was made to get testimony from Mr. Moore with reference to the transaction. It further appears that the bookkeeper who made the pencil notations on the ledger was still in the employ of the Bessemer Investment Co. at the time of the hearing, but was not called as a witness. The facts relative to the agreements, if any, which the Bessemer Investment Co. had with these two men were peculiarly within its knowledge and were not as readily available to the respondent as they were to the petitioner. Under such circumstances we do not feel that the petitioner has sustained the burden of proof which was upon it to overcome the presumption of the correctness of the Commissioner’s determination.

Henry Phipps Estates during 1918 and 1919 held the following pieces of real property situated in the City of New York:

Nos. 3, 5, 7, 9, 11, 13, 15 and 14 Bast 43rd Street, West 27tA Street and 9th Avenue, and 661 to 663 Fifth Avenue.

One of these properties, called West 27th Street and 9th Avenue, was acquired from Henry Phipps on January 31, 1909, and was entered on the books of Henry Phipps Estates at a value of $170,000. The Commissioner allocated a portion of this value to the land and used the remainder as the cost or value of the improvements in computing what he determined was a proper deduction under section 234(a) (7) of the Revenue Act of 1918 for each of the years 1918 and 1919. His treatment of the other properties was similar to his action in regard to this one.

The petitioner does not object to the ratio used in the allocation of portions of the total value to land and to improvements, nor does it object to the rate of depreciation used by the Commissioner. But it contends that the basis or starting figure should have been $215,-771.07 instead of $170,000, because the former represents the cost as shown by the books of Henry Phipps,’ the previous owner, whereas the latter represents merely the tentative (later made final) assessed valuation of the property for 1909, in the City of New York.

Assuming only for the purpose of this discussion that the books of Henry Phipps showed the cost as contended, we are unable to understand how this proves error on the part of the Commissioner. The latter determined the cost of these properties to the petitioner. We are to say whether he has determined the correct cost to the petitioner. The fact that Henry Phipps acquired this West 27th Street and 9th Avenue property in December, 1905, for $215,771.07 and transferred it to the corporation on January 31, 1909, in exchange for the latter’s stock of the total par value of $215,771.07, standing alone, can not in our opinion overcome the presumption that the Commissioner has correctly determined that the cost of the property to the petitioner was $170,000. See Appeal of Kinsman Transit Co., 1 B. T. A. 552. Especially is this true in view of the other facts which appear in this case.

The acquisition by Phipps of the properties on East 43rd Street antedated the transfer of these properties to the corporation by six or seven years instead of by only three years, as in the case of the above property. So their cost to Phipps is of even less importance in determining that their value when transferred to the corporation was greater than that allowed by the Commissioner.

On January 31, 1909, Phipps was already the owner of all but probably two qualifying shares of the stock of the corporation and the transfers of that date doubled his stockholdings in this corporation without otherwise changing the stock ownership. We do not know the market value of a share of this stock at the date of the transfer. Furthermore it is apparent from the petitioner’s evidence that Phipps did not, as contended, receive stock of a total par value of $215,771.07 for the West 27th Street and 9th Avenue property and of $700,144.44 for the East 43rd Street property, inasmuch as he only received 2,500 shares of a total par value of $250,000 in exchange for properties which, if we again assume that his hooks show the cost, cost $4,911,553.74. See his journal entry as set out in our findings of fact.

We are not certain that from the evidence we can determine what took place on January 31, 1909. The resolution of the board of directors of the corporation, passed on January 12,1909, is not before us. But it seems that Phipps transferred to the corporation 10 properties, a note of the corporation in the amount of $326,000 held by him, and rents receivable. The corporation assumed a mortgage of $400,000 on the properties and issued 2,500 shares of stock to Phipps. The market value of the note for $326,000 and the market value of the stock are unknown. How can we determine either the cost of the properties to the corporation or the market value of the properties on January 31, 1909?

In addition to the difficulties already mentioned we can not assume that the entries from the books of Henry Phipps show the cost of this property. We have no information as to who kept these books. We have no proof of that person’s experience, ability or judgment as an accountant. We do not know that he properly separated current expenses from capital items. The entries are not self-explanatory and no one has explained them. The mere fact that some person who is unknown to us has set down a number of debits and has subtracted a number of credits does not disclose the cost of a property. This is even more apparent in connection with the other properties involved in this appeal than with the West 27th Street and 9th Avenue property, since in this one the principal debits are explained as hand money and cash, whereas in some of the others there are large amounts entirely unexplained, or explained merely as accounts payable. These book entries have too many inherent uncertainties and require too many assumptions on our part to be given much weight in the evidence. And even if given weight they would prove only cost to Phipps, a fact with which we are not primarily concerned.

It appears that the property known as 661-663 Fifth Avenue, New York, was not acquired in 1909, as alleged, but was acquired, if at all, in 1911, under circumstances which are not disclosed by the evidence. The entries on Phipps’ books which refer to this property would seem to show that he acquired it only about a month before he transferred it to the corporation. But inasmuch as we are left completely in the dark as to any other fact except that the property was set up on the hooks of the corporation at a value of $645,000, which value was used by the Commissioner, we can not see why we should say that the Commissioner was in error and should have used a value or cost of $985,967.38.

The danger of taking unexplained book entries as evidence of cost is exemplified in this very case. The petition alleges and some of the entries seem to show that all of the properties referred to as Nos. 3, 5, 7, 9, 11, 13, 14, and 15 East 43rd Street were transferred by Phipps to the corporation on January 31, 1909. The petition alleges that these properties had cost Phipps $902,137.36; that he transferred them at this figure to the corporation for stock in 1909, and that the corporation entered them on its books at $595,000, which figure the Commissioner used. And yet other book entries in Phipps’ books offered by the petitioner indicate that Nos. 3, 5, and 7 East 43rd Street, New York, were still carried on Phipps’ books until October 1, 1910, at which date they were transferred to the corporation and the account balanced by a credit of Henry Phipps Estates stock in the amount of $201,992.92. And it further appears that on January 31, 1909, a credit of Henry Phipps Estates stock in the amount of only $700,144.44 was entered to the property No. 14 and Nos. 3 to 15 East 43rd Street, New York. It has not been explained how property which after January 31, 1909, belonged to the corporation was still adding to its cost on the books of an individual.

We must have some proof that either the cost of these properties to the corporation on January 31, 1909, the fair market value of the properties on that date, or their fair market value on March 1, 1913, was something different from the figure used by the Commissioner and such proof must be sufficiently convincing to overcome a presumption in favor of the Commissioner’s determination. Such proof is not before us and therefore on the third allegation of error as above set forth we affirm the Commissioner.

The petitioner’s final contention is that Henry Phipps Estates suffered a loss of $89,497.73 in 1919, when it sold two pieces of improved real estate, each fronting on both 17th and 18th Streets, in New York City — one known as No. 45 West 17th Street, and the other known as No. 44 West 18th Street. It acquired these from Henry Phipps on January 31, 1909, in the same transaction in which it acquired the other properties mentioned above in our discussion of another issue in this case. We have set forth in detail in our findings the method used by the Commissioner in determining that the corporation realized a profit of $279,241.80 from the sale of these two properties.

If we are to determine this issue other than by affirming the Commissioner, we must know the relation of cost (to the seller) to fair market value on March 1, 1913, and we must know the amount of that one of these two figures which forms the basis of the computation of gain or loss. Fair market value at the date of acquisition might be material also, under certain circumstances.

The petitioner’s evidence consists of: (1) book entries, similar in all essentials to the ones we have just discussed in connection with another of the petitioner’s contentions; (2) the assessed values of these two properties for tax purposes in the City of New York, in 1909, 1913, and 1919; and (3) the testimony of a witness who supervised the preparation of an appraisal which was admitted in evidence over the objection of the respondent’s counsel.

The book entries can have no more weight to overcome the presumption of the correctness of the Commissioner’s determination on this point than they had to overcome a similar presumption in the other issue. Our remarks as to those entries in our discussion of that other issue apply with like force here. We are concerned with cost to the petitioner or March 1, 1913, fair market value, and cost to one who previously owned the property for several years, even if proven, is not of itself determinative of this issue.

We know the assessed values of these properties for the purposes of taxation in New York City. But no one has related those assessed values to cost or fair market values on January 31, 1909, or March 1, 1913, and yet it is a well known fact that assessed values are not necessarily indicative of fair market values. See Pitney v. Duffy, 291 Fed. 621; Appeal of American Express Co., 2 B. T. A. 498; Appeal of William A. Daly, Administrator, 1 B. T. A. 993; and Dorr v. Massachusetts Title Insurance Co., 238 Mass. 490; 131 N. E. 191.

The petitioner called as a witness an experienced appraiser, the vice president of an appraisal company. He said he had been engaged for many years in making appraisals of land, buildings, and equipment of industrial and other concerns in New York and elsewhere in the United States. He said that he was familiar with building and construction values in New York since 1909. In December, 1925, he made a physical examination of the two properties with which we are here concerned. He told how his company had been called upon to appraise these properties and how the appraisal had been made by himself and three others under his personal direction. He then gave his opinion, based upon this appraisal, that the two properties had a fair market value on January 31, 1909, of $1,300,000 and on March 1, 1913, of $1,250,000, although the report showed a March 1,1913, value of only $1,234,681.30.

This man’s testimony and the appraisal which he prepared might be very valuable for some purposes, but as offered in this case they have but slight weight in the evidence. If the witness was familiar with land values in New York either in the years 1909 or 1913, or as of 1909 or 1913, the extent of his familiarity was not shown. So far as we know he saw the properties for the first time in December, 1925. It was not shown that the properties as they then existed were substantially the same as they were in 1909, 1913, or 1919, allowance being made for the changes due to passage of time and use. The witness accepted the Phipps’ books as proof of facts, whereas we have declined to accept them as proof of those facts. The appraisal report discloses that for evidence of land values it relies upon inquiries and not upon the opinion of any of the appraisers. It also discloses that many material facts not known to the appraisers were approximated. It appears that this report purports merely to check the cost of the properties to Phipps as shown by his books and to give an estimated reproduction cost of the buildings as of March 1, 1913, plus the cost of the land to Phipps. Fair market values were arrived at mathematically by deducting depreciation from the estimated cost to Phipps. t

We have discxxssed similar appraisals heretofore in many cases. See, for example, Appeal of Rockford Malleable Iron Works, 2 B. T. A. 817; Appeal of Tibby-Brawner Glass Co., 2 B. T. A. 918; and Appeal of Carrie W. Meinhard, 3 B. T. A. 612. This particular appraisal is of no assistance to us in deciding whether there was a profit or a loss to the petitioner on the sale of this real estate. The opinion of the witness is no more convincing than his report on which his opinion was based. His estimate of the life of the buildings, if different from the Commissioner’s, is of no value until we know that he was considering substantially the same buildings as existed in 1909 or 1913.

The respondent offered no evidence other than the admitted fact that he took the value or cost of these properties as shown by the corporation’s books as the basis for his calculation. In every case before us there is a presumption that the determination of the Commissioner is correct. This presumption may be overcome by proof, and where the method of arriving at his determination is unexplained or appears to be an arbitrary, improper or unreasonable method, the presumption may be overcome by very slight proof. But in any case there must be proof of some fact which tends to show the incorrectness of the Commissioner’s determination. In this case on this issue we have searched in vain for proof of any such fact and therefore affirm the Commissioner.

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

Considered by Trammell, Morris, and Siefkin.


author: ARundell :

text:
    Ernest E. Lloyd, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 24414.
    Promulgated October 28, 1927.
    Amount expended by petitioner in an unsuccessful effort to secure a secret formula for the corporation of which he was president, under an agreement whereby he was to be reimbursed if the venture was successful, held deductible as a loss.

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

      H. D. Thomas, Esq., for the respondent.
    The Commissioner has determined a deficiency in income tax for the year 1922 in the amount of $1,422.06. The case was submitted on the pleadings.
    FINDINGS OF FACT.
    Petitioner is president of the E. E. Lloyd Paper Co., a corporation engaged in the manufacturing and sale of paper, with its principal office in Chicago, Ill. Prior to and in the early part of the year 1922 petitioner was approached by A. B. Lewis, president of the Western Lithographers Association, who urged that the E. E. Lloyd Paper Co. consider entering into a contract with the Western Lithographers Association for the furnishing of a supply of safety paper for the uses of its members. The E. E. Lloyd Paper Co. was not at that time in a position to enter into such a contract by reason of the fact that the manufacture of commercial safety paper required knowledge of a secret formula, which secret formula was not known to the E. E. Lloyd Paper Co. or any of its officers. Petitioner was nevertheless urged by Lewis to procure the formula and was assured that his company would be given a very profitable contract with the Western Lithographers Association if petitioner could ascertain the nature of the formula in question and undertake the manufacture of safety paper. The contract then in contemplation was a contract to supply such paper for the year 1928.
    Petitioner presented the matter to the directors of the E. E. Lloyd Paper Co. They were unwilling to advance the funds necessary in an investigation having for its purpose the ascertainment of the secret formula for making safety paper. Petitioner, being desirous that the company proceed, finally agreed to advance the funds necessary for such investigation with the understanding that such advances would be repaid to him in the event that the effort was successful and a contract for safety paper for the year 1923 was negotiated with the Western Lithographers Association.
    Petitioner employed one Garfield Charles to endeavor to secure the secret formula. This employment continued during the greater part of the year 1922 and petitioner paid to Charles in and for the year 1922 a total amount of $5,748.94 to conduct the investigation. The investigation was wholly unsuccessful and the E. E. Lloyd Paper Co. did not reimburse petitioner on account thereof either in 1922 or at any other time.
    In his income-tax return for the year 1922 petitioner claimed as a deduction on account of business expenses the sum of $5,748.94 paid to Charles. In the audit of petitioner’s return for the year 1922 respondent disallowed the item as a deduction.
   OPINION.

ARundell :

The amount expended by petitioner in 1922 is claimed under section 214(a) (4) of the Revenue Act of 1921 providing for the deduction of:

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

The word loss ” is a comprehensive one. As said in Electric Reduction Co. v. Lewellyn, 11 Fed. (2d) 493; 5 Am. Fed. Tax Rep. 5897:

“ Failure to keep that which one has is a loss.” Foehrenbach v. German-American Title & Trust Co., 6 A. 561, 217 Pa. 332, 12 L. R. A. (N. S.) 465, 118 Am. St. Rep. 916. There are many kinds of loss: Money out of pocket; a judgment, changing the status from solvency to insolvency. Schambs v. Fidelity & Casualty Co., 259 F. 55, 58, 170 C. C. A. 55, 6 A. L. R. 1231.

Petitioner here spent the sum of $5,748.94 and was unable to secure reimbursement due to the failure of the project. Had the venture been successful, he would have been repaid. As the matter stood at the close of the taxable year he was out of pocket the sum claimed. It was, as we see it, a loss “ not compensated for.” We are further of the opinion that the loss was “ incurred in trade or business ” in that the furtherance of the business of the company of which he was president was legally and logically his business.

Judgment will be entered on 15 days' notice, under rule 50.

Considered by Lansdon, Sternhagen, and Green.


author: Lansdon :

text:
    Kennington Realty Co., Union Department Store Co., R. E. Kennington Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7834-7837.
    Promulgated October 28, 1927.
    1. The petitioners were entitled to make a consolidated income and profits-tax return for each of the fiscal years and for the fiscal period involved.
    2. Payments made to certain employees who were owners of record of shares of stock of the petitioners in the circumstances of this proceeding, were dividends and should not be deducted from income as compensation of employees.
    3. Insufficient evidence upon which to disturb respondent’s computation of prewar invested captial.

      Henry J. Richardson, Esq., for the petitioners.

      J. Harry Byrne, Esq., for the respondent.
    The respondent asserts deficiencies in income and profits tax as follows: Kennington Realty Co., for the fiscal year ended January 31, 1920, $125.61; Union Department Store Co., for the fiscal year ended January 31, 1920, $7,169.67; and R. E. Kennington Co., for the fiscal years ended January 31, 1919, January 31, 1920, and the fiscal period February 1, 1920, to May 31, 1920, in the respective amounts of $6,043.03, $27,918.08, and $3,685.41, or a total of $44,941.80. The petitioners claim (1) that they should be permitted to file consolidated income and profits-tax returns for each of the years and period in question, and (2) that certain credits on stock accounts of employees represent compensation to such employees and are proper deductions from income for the years in which made. By agreement of counsel the three cases with four docket numbers were consolidated for hearing and decision.
    FINDINGS or FACT.
    The petitioner, R. E. Kennington Co., during the taxable years and period here involved, was a Mississippi corporation with its principal office at Jackson, where it was engaged in the wholesale and retail merchandising business. It was incorporated on February 4, 1916, and was the successor of an individual business theretofore conducted by R. E. Kennington. At the date of its incorporation it acquired all the assets and assumed all the liabilities of the predecessor individual enterprise and paid R. E. Kennington therefor $20,500 in cash and its preferred and common stock shares of the par value of $100 each in the respective amounts of 1,000 and 995 shares. All shares had equal voting powers and the preferred shares in addition to the usual preferences provided for cumulative dividends at the rate of 15 per cent per annum with the condition that all such deferred dividends should draw 6 per cent per annum from date due to date of payment.
    The petitioner, Union Department Store Co., during the taxable years and period here involved, was a Mississippi corporation with its principal office at Jackson, where it was engaged in the general merchandising business. It was incorporated on February 4, 1916, and was the successor of an individual business theretofore conducted by R. E. Kennington. At the date of its incorporation it acquired all the assets and assumed all the liabilities of the predecessor individual enterprise and paid R. E. Kennington therefor the amount of $1,139.52 cash; and its preferred and common stock shares of the par value of $100 each in the respective amounts of 300 and 296. All such shares had equal voting powers and the preferred shares in addition to the usual preferences provided for cumulative dividends at the rate of 15 per cent per annum with the condition that all deferred dividends should draw 6 per cent interest per annum from due date to date of payment.
    The petitioner, Kennington Realty Co., during the years and period here involved, was a Mississippi corporation with its principal office at Jackson, where it was the owner of certain real estate. It was incorporated in 1911, at which date all its capital stock, 400 shares of the par value of $100 each, except certain qualifying shares, was issued to R. E. Kennington in exchange for real estate.
    Subsequent to incorporation but prior to the taxable years and period here involved, R. E. Kennington transferred certain shares of the common stock of the R. E. Kennington Co. theretofore issued to him as follows: to R. G. Kennington, 250 shares; to A. B. Cook, 100 shares; to J. C. Battaile, 50 shares; and to C. L. Dickson, 50 shares. At the same time he transferred stock of the Union Mercantile Co. theretofore issued to him as follows: to R. G. Kennington, 60 shares; to A. B. Cook, 25 shares; and to K. Walker, 50 shares.
    The above-described transfers of common stock were evidenced by proper entries on the books of the respective corporations and by the issue of stock certificates each of which had the following contract duly signed, printed on the back thereof:
    The agreement, entered into this- day of-, 19 — , by and between R. E. Kennington, of Jackson, Mississippi, party of the first part, and -, of Jackson, Mississippi, as party of the second part, Witnesseth:
    That, whereas, the said R. E. Kennington, party of the first part, has caused to be transferred and issued to the party of the second part, the annexed certificate for - shares of the common stock in the -, of Jackson, Mississippi, as a gratuity for the purpose of stimulating the efforts of the party of the second part, as an employe in said corporation.
    Now, therefore, for and in consideration thereof, I, -, the party of the second part, bind and obligate myself, at any time after February 1st, next, on demand of the said R. E. Kennington, party of the first part, to re-convey said stock, or such part thereof as he may require, to the said R. E. Kennington, party of the first part, upon the payment to me in cash of the net value thereof, as shown by the books of said Company as of February 1st preceding such demand. That the value of said stock, as shown by the books of the Company, as of the date aforesaid, when approved by the Executive Committee of the Company, shall be conclusive on the parties hereto, and anyone claiming under them or either of them.

      And the said It. E. Kennington, party of the first part, binds and obligates bimself, whenever demand is made upon him so to do by-, the party of the second part, to purchase from the party of the second part, at any time after February 1, nest, and pay for, in cash, said - shares of stock, or such part thereof as the party of the second part may demand that he purchase; and the said party of the first part further binds and obligates himself to pay for said stock, in cash, the net book value thereof, as shown by the books of the Company as aforesaid. It is understood and agreed, however, that in arriving at the net book value of said stock, the value of the good will of said business, and trade marks, etc., shall not be considered, but shall be excluded.
    It is further understood and agreed that the party of the second part binds and obligates himself not to sell, assign, hypothecate or deliver said stock, or any portion thereof, to any other person, firm or corporation.
    Witness our signature this, the day and year above written.
    Resulting from the stock interests acquired as above set forth the following amounts were received by the holders of such stock of R. E. Kennington Co. during the taxable years and period here involved:

    Resulting from stock interests acquired as above set forth the following amounts were received by the holders of such gratuity stock of the Union Department Store Co.

    The amounts paid to holders of the gratuity stock were determined by first ascertaining the net earnings of the respective companies from the periods for which payments were to be made. From the net earnings of each company the amount of the preferred stock dividend was subtracted and the remainder was divided among the holders of the gratuity stock of each company in the proportion of their stockholdings to the entire amount of outstanding common stock. In the time here involved neither petitioner paid any dividends on its common stock owned by R. E. Kennington.
    During the fiscal years and fiscal period involved the issued stock of the petitioners was held in the following percentages:

    All the common stock except that standing in the name of R. E. Kennington was held subject to the provisions of the contract on the back of the gratuity stock certificates.
    The three petitioners made consolidated income and profits-tax returns for the fiscal years and fiscal period here involved and in each year deducted from gross income as compensation paid to employees the amounts paid to holders of the so-called gratuity stock certificates. Upon audit the Commissioner held that the petitioners were not affiliated, disallowed the amounts paid on account of gratuity stockholdings as ordinary and necessary expenses, made certain adjustments in statutory invested capital and determined the deficiencies here in controversy.
    During the fiscal years 1919 and 1920 R. G. Kennington received annual salaries from R. E. Kennington & Co. and the Union Department Store Co. in the respective amounts of $3,600 and $1,200; K. F. Walker received a salary of $4,000 per year from the Union Department Store Co.; C. L. Dickson received a salary of $3,300 per' year from R. E. Kennington & Co.; and A. B. Cook and J. C. Battaile received salaries from one or both corporations in amounts not disclosed by the record.
    For several years prior to the transfers of stock above set forth it was the practice of the R. E. Kennington Co. and the Union Department Store Co. to pay each of the employees to whom such stock was issued an extra compensation or bonus during or at the close of each year. After the issue of stock to such employees the payment of extra compensation was discontinued.
   OPINION.

Lansdon :

The petitioners herein claim the right to file consolidated income and profits-tax returns for the fiscal years and period here involved and rely for authority so to do on section 240 (b) of the Revenue Act of 1918 which provides: “ For the purpose of this section two or more domestic corporations shall be deemed to be affiliated * * * (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.” The evidence discloses that R. E. Kennington was owner of record and in fact of 77% per cent, 77% per cent and 100 per cent respectively, of the three petitioners. In addition to his actual ownership of these percentages of the stock he exercised control of the remainder by virtue of the contract under which the so-called gratuity stock was issued to various employees of the three petitioners. We are of the opinion that the petitioners were entitled to affiliation for income and profits-tax purposes during the taxable years and taxable period involved. Appeal of Midland, Refining Co., 2 B. T. A. 292; Appeal of Wright Cake Co., 2 B. T. A., 58; Paris Cloak, Suit & Millinery House v. Commissioner, 5 B. T. A. 189.

The second contention of the petitioners is that the amounts paid to the owners of the so-called gratuity stock were not dividends resulting from distribution of corporate earnings but in fact were bonuses or additional compensation for services rendered and therefore were deductible as ordinary and necessary expenses from gross income of the several petitioners in the respective years in which such payments were made. To sustain this issue the petitioners rely on the fact that as the holders of the gratuity stock paid nothing therefor and had no investment therein, the payments received can not be regarded as dividends and on the further fact that such stock was held under the terms of a contract that authorized R. E. Kennington to recall and cancel it at any time on payment of its book value. The record discloses that except for the limitations of the contract the gratuity stock was the absolute property of the employees to whom it was issued. They could vote it and they could and did receive distributions of corporate earnings ratably as to their holdings. That no dividends were paid on the common stock held by R. E. Kennington is not material since by unanimous agreement of all stockholders, corporations may distribute earnings to stockholders other than ratably on the basis of stock holdings. Joseph Goodnow & Co., v. Commissioner, 5 B. T. A. 1154; 6 Fletcher on Corporations p. 6114, sec. 3674; C. J. 815; Breslin v. Fries-Breslin Co., 70 N. J. L. 274; 58 Atl. 313, 318. The petitioners also argue that the distributions or payments in question were not made as a result of corporate action declaring dividends. Inasmuch as each of the petitioners was a close corporation controlled by one man and that the distributions in question were computed and paid by an officer of the R. E. Kennington Co., it may be presumed that such action, though informal, was authorized by the corporation. We are of the opinion that the payments in question were distributions and that the amount thereof should be added to the gross income of the respective petitioners for each of the years and period here involved. Cf. Appeal of Hamilton Manufacturing Co., 3 B. T. A. 1045.

The evidence adduced in support of the petitioners’ allegation that the Commissioner erred in the computation of the prewar invested capital of the individual concern afterwards incorporated as the three petitioners is insufficient to serve as a basis for any findings of fact.

Judgment will be entered on 10 days' notice, under Rule 50.

Considered by Sternhagen and Arundell.