author: Littleton :

text:
    Tootal Broadhurst Lee Co., Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 15962.
    Promulgated November 25, 1927.

      F. Morse Hubbard, Esq., for the petitioner.

      Henry Ravenel, Esq., for the respondent.
   OPINION.

Littleton :

The issue is whether income derived by a foreign corporation from the sale in the United States of merchandise manufactured without the United States is income from sources within the United States under section 233(b) of the Revenue Act of 1918, which provides as follows:

In the case of a foreign corporation gross income includes only the gross income from sources within the United States, including the interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise,-dividends from resident corporations, and including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States.

In Richard L. Birkin, 5 B. T. A. 402, the Board had before it a foreign partnership manufacturing merchandise abroad and selling it in the United States. In that proceeding the petitioners contended that a part of the profit realized on the sale in the United States should be attributed to the manufacturing operations in England, and, therefore, there should be an allocation between the two countries of the total profit on the ground that the source of the entire income was not within the United States. The Board rejected the petitioner’s contention and held that the source of the entire profit, representing the difference between the cost of goods sold (which included in that instance manufacturing cost and selling, transportation and other incidental expenses) and the sales price, was income from sources within the United States for the reason that “ The law of the United States recognizes no income in the unrealized appreciation of value of goods or property, * * * but treats such appreciation as taxable income only when it comes to hand as the profit from sale.” In other words, the source of income in such an instance was the sale of the goods, and since this took place in this country, the entire profit realized was to be included in the gross income of the foreign partnership.

While the foregoing case arose under section 213 (c) and this proceeding involves section 233 (b) of the same Act, the former defining gross income of nonresident individuals and the latter the gross income of foreign corporations, the language in each instance is identical. Therefore, the conclusion reached in Richard L. Birkin, supra, is controlling here. The petitioner, however, contends that the Birhin case is not controlling for the reason that the Board, in its discussion, referred almost entirely to the question of the source of income under the circumstance of that case;-that a construction of subsection (b) of section 233, which the petitioner considers determinative of the issue in its case, was neither urged nor argued in the other proceeding. Since in the Birhin appeal the Board was concerned with the extent to which a certain item should be included in the gross income of a foreign partnership, it became necessary to consider and the Board did consider whether, under the governing provisions of the Act, the whole or any part of such income was to be included in gross income under section 213 (c) of the Revenue Act of 1918. This made necessary a consideration of the entire section, though reference was made in the opinion only to the part of the statute on which the petitioner relied.

In this proceeding the Board’s attention is directed particularly to that part of section 233 (b), as follows: “ and including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States.” The petitioner’s contention is that in the case of a foreign corporation engaged in the manufacture and sale of merchandise, the profits on such merchandise can be included in gross income for income and profits-tax purposes only when both the manufacture and disposition take place in the United States. It therefore argues that since it did not both manufacture and sell in the United States, the entire income from sales in the United States on merchandise manufactured abroad should be excluded from gross income. We are unable to agree that a proper construction of the statute leads to this conclusion.

The statute does not attempt to set out with particularity the various classes of income to be included in the gross income of a foreign corporation. It provides that income to be included is only that which is derived from sources within the United States. The Board held in the Birhin case that when the manufacture takes place abroad and the merchandise is sold within this country, the entire profit is realized when the sale is made, and that this profit represents income from sources within the United States.

The next question is whether, even although this profit be considered income from sources within the United States, it should be excluded because of some other provision of the statute limiting the income from sources within the United States, in the case of a foreign manufacturing corporation, to income realized when both the manufacture and sale take place within this country. While the purpose of section 233(b) was undoubtedly to limit the income taxable to foreign corporations to income derived from sources within the United States, we fail to find anything in the statute which would warrant the exclusion of income when the source has been held to be within the United States. The clauses which follow the provision that “gross income of a foreign corporation includes only the gross income from sources within the United States,” are not all-inclusive but are rather to be considered as types of income which would fall within the broad classification of income from sources within this country. Had the word “ including ” been followed by the word “ only ” in each instance, then it might follow that only these classes of income should be included in the gross income of foreign corporations. But words of an excluding nature are absent in these “ including ” clauses. The clause to which the petitioner directs our particular attention reads: “ including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States.” (Italics ours.) This language does not indicate a purpose on the part of Congress to exclude profits which are otherwise includable under the broad definition of gross income of a foreign corporation.

In the absence of anything in the Act itself or in the legislative history of the section in question as to the reason for the enactment of the clause which the petitioner considers of paramount importance, it would be futile to speculate as to the reason for its existence. In the opinion of the Board, a plausible explanation of this clause ■would be that it was inserted as an inhibition against a tax on the mere manufacture of merchandise, which would be tantamount to a tax on unrealized appreciation, and that a tax could not be asserted until the sale had taken place. The latter feature is recognized by the Commissioner, having for its authority an opinion of the Attorney General dated November 3, 1920 (32 Op. Atty. Gen. 336). In National Paper & Type Co. v. Bowers, 266 U. S. 373, and Barclay & Co. v. Edwards, 267 U. S. 442, the court in upholding the constitutionality of the section here being considered, held that it was not unreasonable to levy a tax on domestic corporations which manufactured in this country and sold abroad, whereas foreign corporations which similarly manufactured and sold would not be taxed. One of the reasons cited by the court in support of its opinion was that “ foreign corporations are taxed only on their income from sources within the United States because, to repeat, only that income is earned under the protection of American laws.” Apparently, therefore, in order to eliminate any doubt that only income earned under the protection of American laws should be included in gross income of foreign corporations, the aforementioned provision was inserted. Suffice it to say, however, that whatever may have been the purpose in adding this provision, we fail to find anything therein which would cause income to be excluded from gross income of a foreign corporation which is derived from sources within the United States.

Finally, we are convinced that in the absence of a positive declaration in the statute to this effect, there is no more reason for excluding from the gross income of a foreign corporation the profit realized on the sale of merchandise when the manufacture takes place abroad and the sale in this country than there is for excluding profit on a sale when there is a purchase abroad and a sale in this country. In the final analysis, what takes place abroad is not essentially different in the two instances, since in the ordinary manufacturing operation there is first a purchase of the raw materials and then a purchase of the labor and machinery necessary to produce the finished article, instead of an outright purchase of the finished article. The interpretation contended for by the petitioner would include the profit as taxable income in one instance, but would exclude it in the other. Compelling reasons would have to exist to warrant such a result and these we do not find in the statute, either expressed or implied.

Accordingly, the action of the Commissioner in including in the gross income of a foreign corporation profits on the sale of goods in this country which it manufactured abroad, is sustained.

Reviewed by the Board.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    J. T. M. Johnston, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8466, 10928.
    Promulgated November 25, 1927.

      Don Q. Haynes, Esq., for the petitioner.

      Wm. H. Lawder, Esq., for the respondent.
   OPINION.

Smith:

Petitioner claims deductions on account of the alleged losses enumerated under section 214(a) (4) of the Revenue Act of 1918, which provides for the deduction of “losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.”

The evidence sustains the contention of the petitioner with respect to the losses claimed to have been sustained except that referred to in finding (3) above. The evidence does not show when the Theo. Photiades Corporation became insolvent and when the petitioner’s shares of stock became worthless. The petitioner tried to force the son of his business associate, who had guaranteed him against loss in this investment, to make good his guarantee in 1919. This the individual refused to do and the petitioner was advised by the attorney that he had no case against the individual. So far as the record shows the loss may have been sustained many years prior to 1919.

The other losses shown by the findings of fact are deductible from gross income as indicated.

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

Considered by Littleton, Trussell, and Love.


author: Smith :

text:
    Earle C. Emery and Lewis Emery, Executors, Estate of Lewis Emery, Jr., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9766.
    Promulgated November 25, 1927.

      James Walton, Esq., Clarence A. Miller, Esq., and J. M. Gumming, O. P. A., for the petitioners.

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

Smith :

The petitioners herein, treating the notice addressed to the decedent by the Commissioner under date of October 21, 1925, as a deficiency notice, appealed to this Board on December 8, 1925, from the deficiency found by the Commissioner for the year 1917. The B’oard has jurisdiction of the appeal by virtue of section 283(f) of the Revenue Act of 1926. No question is raised as to the jurisdiction of the Board with reference to the deficiency determined for the year 1920 which was communicated to the petitioners in a deficiency notice dated October 21, 1925.

The petitioners admit the correctness of the deficiency determined for the year 1920. They further contend that there is no deficiency for the year 1917 but choose to rest their defense with reference to the deficiency upon the statute of limitations.

Section 250 (d) of the Revenue Act of 1921 provides:

The amount of income, excess-profits, or war-profits taxes clue under any return made under this Act for the taxable year 1921 or succeeding taxable years shall be determined and assessed by the Commissioner within four years after the return was filed, and the amount of any such taxes due under any return made under this Act for prior taxable years or under prior income, excess-profits, or war-profits tax Acts, or under section 38 of the Act entitled “An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” approved August 5, 1909, shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax; and no suit or proceeding for the collection of any such taxes due under this Act or under prior income, excess-profits, or war-profits tax Acts, or of any taxes due under section 38 of such Act of August 5, 1909, shall be begun, after the expiration of five years after the date when such return was filed, but this shall not affect suits or proceedings begun at the time of the passage of this Act: Provided, That in the case of income received during the lifetime of a decedent, all taxes due tliereon shall be determined and assessed by the Commissioner within one year after written request therefor by the executor, administrator, or other fiduciary representing the estate of such decedent: Provided further, That in the case of a false or fraudulent return with intent to evade tax, or a failure to file a required return, the amount of tax due may be determined, assessed, and collected, and a suit or proceeding for the collection of such amount may be begun, at any time after it becomes due: Provided further, That in cases coming within the scope of paragraph (9) of subdivision (a) of section 214, or of paragraph (8) of subdivision (a) of section 234, or in cases of final settlement of losses and other deductions tentatively allowed by the Commissioner pending a determination of the exact amount deductible, the amount of tax or deficiency in tax due may be determined, assessed, and collected at any time; but prior to the assessment thereof the taxpayer shall be notified and given a period of not less than thirty days in which to file an appeal and be heard as hereinafter provided in this subdivision.
If upon examination of a return made under the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, or this Act, a tax or a deficiency in tax is discovered, the taxpayer shall be notified thereof and given a period of not less than thirty days after such notice is sent by registered mail. in which to file an appeal and show cause or reason why the tax or deficiency should not be paid. Opportunity for hearing shall be granted and a final decision thereon shall be made as quickly as practicable. Any tax or deficiency in tax then determined to be due shall be assessed and paid, together with the penalty and interest, if any, applicable thereto, within ten days after notice and demand by the collector as hereinafter provided, and in such cases no claim in abatement of the amount so assessed shall be- entertained: Provided, That in cases where the Commissioner believes that the collection of the amount due will be jeopardized by such delay he may make the assessment without giving such notice or awaiting the conclusion of such hearing.

This provision of the law was before the Supreme Court of the United States in Bowers v. New York & Albany Lighterage Co., 273 U. S. 346. One question in that case was whether distraint was a proceeding ” within the purview of the above quoted section 250(d) of the 1921 Act. The court held that it was and that collection was barred 5 years after the date the return was filed even though the taxes were duly assessed within the five-year period provided. The principle laid down in the New York & Albany Lighterage Co. case, supra, has been followed in Thornhill Wagon Co. v. Noel, 17 Fed. (2d) 407; Ehrlich v. Nichols Co. (U. S. D. C. Mass.), decided March 4, 1927. A question similar to the one involved herein was before the Board in Ocean Accident & Guarantee Corporation, Ltd., 6 B. T. A. 1045, and in Reliance Manufacturing Co., 7 B. T. A. 583. In the former case it appeared that the petitioner filed its income and profits-tax return for 1917 on May 1, 1918. In March, 1923, an additional assessment for the year 1917 was made by the Commissioner. A claim for abatement was then filed which was rejected in part on March 9, 1925. On April 6, 1925, an appeal was taken to this Board and the Board held that the collection of any additional tax for the year .1917 was barred by the statute of limitations and that consequently there was no deficiency. In the Reliance Manufacturing Co. case, supra, it appeared that the final return for 1918 was filed on June 16, 1919. A jeopardy assessment was made against the taxpayer in 1924, and on February 29, 1924, a claim for the abatement of the assessment was filed. On July 30, 1925, the claim for abatement was rejected in part and on August 6, 1925, a petition was filed with this Board. The Board held that the collection of the tax for the year 1918 was barred by the statute of limitations and, consequently, that there was no deficiency.

The only factor which would differentiate this case at all from the two Board cases above referred to is that on February 11, 1924, Lewis Emery, Jr., the decedent, and the Commissioner entered into a consent for a “ determination, assessment, and collection ” of the amount of income, excess-profits and war-profits taxes due for the year 1911, such consent to be in effect for one year from the date it was signed by the taxpayer. This consent had expired prior to the date when the Commissioner finally adjudicated the claim for abatement. It is, therefore, without effect so far as the present issue is concerned. Since the petitioner’s case is in all material respects the same as those of the Ocean Accident & Guarantee Corporation, Ltd., supra, and Reliance Manufacturing Co., supra, it must be held that there is no deficiency for the year 1917.

Judgment of no deficiency will he entered for the petitioners so far as the yea/r 1917 is concerned and judgment for the respondent will he entered for the admitted deficiency of $37,f71.1¡3 for the year 1920.

Considered by LittletoN, Tkusseul, and Love.


text:
    New England Furniture & Carpet Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11128.
    Promulgated November 25, 1927.

      A. S. French, O. P. A., for the petitioner.

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

Smith:

The Board has no jurisdiction to determine the tax liabilities for the fiscal years ended January 31, 1922, and January 31, 1923, the Commissioner not having determined any deficiencies for those years. Section 274(g), Revenue Act of 1926.

The petitioner’s excess-profits-tax liability for the fiscal years ended January 31, 1920, and January 31, 1921, is to be determined upon the installment sales basis as set forth in section 212(d) and section 1208 of the Revenue Act of 1926. The petitioner claims the right to include in invested capital the profits included in the installment accounts receivable outstanding at the beginning of each taxable year. The identical question was before the Board in Appeal of Blum's Inc., 7 B. T. A. 737, in which the Board stated:

In computing invested capital in the deficiency notice, the Commissioner included, as a part of the earned surplus, the entire profits of installment sales effected in 1917. In the amended answer, the Commission eliminated from invested capital of 1918, 1919, and 1920, the profits included in the outstanding-1917 installment accounts receivable, at the beginning of each of those years, as unrealized and not properly includable in earned surplus. The petitioner opposes this action of the Commissioner on the ground that the entire profits on installment sales of 1917 were returned and taxed as income of that year. We think that the action of the Commissioner, as set forth in the amended answer, is correct. For tibie years in question, the installment sales method has been used in computing income. By the use of that method all of the profits actually reduced to possession in those years, are to be returned as income of those years. The fact that some of these profits have been returned in prior years is to be ignored, and they are, for the purposes of the tax, to be treated as a part of the earnings of the years'in which they are reduced to possession. Obviously, the petitioner may not include in invested capital of any taxable year, as earned surplus, the earnings of that year and subsequent years.

The above-mentioned, opinion of the Board was promulgated after the hearing in the instant case. In his brief counsel for the petitioner refers to the opinion of the Board in Blum’s, Inc., supra, and contends that it was in error in that it was the intention of Congress in the enactment of the Revenue Act of 1926 to give taxpayers making returns upon the installment basis the benefit of including! in invested capital profits upon sales made prior to the beginning' of the taxable year even though the profits had not been collected and reflected in taxable net income. He calls attention particularly to article 42 of Regulations 45, and rulings of the Commissioner contained in O. D. 623, 3 C. B. 105, and- O. D. 793, 4 C. B. 87, as approved, supporting his contentions. In his brief he states:

It is tbe petitioner’s contention that section 212 (d) of the 1926 Act was passed and made retroactive for the purpose of giving installment houses benefits that would accrue to them by reporting profits from installment sales as being realized as of the date of the collection of the outstanding accounts and to confirm the acts of the Commissioner, who pursuant to authorized regulations had permitted installment houses to so report their profits and in so reporting their profits had permitted the inclusion in invested capital of tax-paid profits on installment accounts receivable for prior years for the year in which the taxpayers changed their method of reporting profits from installment sales.

We should call attention to the fact that the rulings of the Commissioner, published in a cumulative bulletin, other than Treasury Decisions, are not regulations of the Commissioner published pursuant to law with the approval of the Secretary of the Treasury. The regulations of the Commissioner contained in article 42 are noncommittal upon the point in issue.

The underlying theory of returns made upon the installment basis has been set forth by the Board in Appeal of B. B. Todd, Inc., 1 B. T. A. 762, and that of Blum’s, Inc., supra. No argument is advanced by the petitioner which, in our opinion, warrants any modification of the portion of the opinion in Blum’s, Inc., quoted above.

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

Considered by Littleton, TRüssell, and Love.

Trussell dissents.


author: MttRdock :

text:
    Mathis Brothers Co. and New York Blower Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3861.
    Promulgated November 25, 1927.

      Herman A. Fischer, Esq., and Jacob Auer, G. P. A., for the petitioners.

      J. Harry Byrne, Esq., and Willis D. Nance, Esq., for the respondent.
   OPINION.

MttRdock :

At the outset it should be stated that consideration of this case has been extremely difficult, because of the manner in which it has been presented to us. The petition does not contain, as the rules of the Board require, clear and concise assignments of error, nor a clear and concise statement of the facts upon which the petitioners rely as sustaining the assignments of error. Only after a very diligent study of the record as a whole have we been able to determine with any degree of certainty what the issues are which we are asked to decide. Considerable and fairly satisfactory evidence has been submitted by the petitioners of the nature of the respondent’s various and sundry adjustments of net income and invested capital; but, generally speaking, the evidence of the facts upon which the petitioners rely to overcome the prima facie correctness of those adjustments is vague, indefinite, and unsatisfactory..

The first issue is that the Commissioner has overstated net income for 1919 by $33,967.31. No facts are set out in the petition in support of the assignment of error. At the hearing the petitioners presented evidence that items of expense were erroneously charged on the books of account to capital asset accounts, and of the circumstances surrounding the writing off of patents, in the amount of $2,026.80, which was not allowed as a deduction for the purpose of the tax. Statements of witnesses and of counsel for the petitioners at the hearing vaguely indicated that the total of expense items which were charged to capital asset accounts, and which should have been charged against income, amounted to approximately $1,936; but the evidence goes no further than to establish that fire insurance of $184.34, watchman’s wages of $45, and purchases of zinc for use in the plant of one of the petitioners, in the amount of . $350, were erroneously recorded on the books. The Commissioner’s determination of net income is based upon the book accounts; and since he failed to make proper adjustments for expense items erroneously recorded therein, the net income shown' in the deficiency notice is overstated $579.34.

As to the charge against income of $2,026.80, representing the writing off of two patents, which was not allowed as a deduction, the evidence shows that one of these patents became obsolete and its use was discontinued in 1917, while a like fate befell the other one in 1918. The obsoleteness and discontinuance of the use of the one patent in 1917 occurred in a taxable year prior to that which we have under consideration, and clearly the loss incidental thereto is not a proper deduction from income of the latter year. On the other hand, since the year which we have under consideration began on August 1,1918, the loss and discontinuance of the use of the other patent in 1918 may or may not constitute a proper deduction from the income of the year under consideration, depending on whether obsoleteness and discontinuance occurred after July 31, 1918, or before August 1, 1918. The evidence merely shows that obsoleteness and discontinuance occurred in 1918, and does not show the relation of the date of those happenings to the taxable year under consideration. Furthermore, there is no evidence as to what proportion of the amount written off applies to each patent; and had it been possible to find that obsoleteness and discontinuance of the use of the one patent in 1918 occurred within the year under consideration we would still have been unable to find the amount of the loss which the petitioners would be entitled to deduct. Under the circumstances we may not disturb the Commissioner’s action in disallowing the deduction in question.

The second issue is that invested capital has been reduced erroneously because of alleged inadequate depreciation charged off in prior years. On examination of the evidence we find that on August 1, 1918, the beginning of the taxable year under consideration, the petitioners carried on their books of account depreciable assets of $42,694.82, and depreciation reserves, applicable to those assets, in the total sum of $18,294.16. The net book value of the petitioners’ depreciable assets was, therefore, $24,400.66. The revenue agent who examined the petitioners’ books for the year under consideration, by computing depreciation for each year from date of organization to the beginning of the taxable year according to the straight line theory and at the rate of 15 per cent per annum, determined that the accrued depreciation was sufficient to wipe out all but $1,200 of the book value of the petitioners’ depreciable assets, and, accordingly, he reduced earned surplus and invested capital by $23,200.66. In the deficiency notice the sum of $34,731.96 was restored to invested capital, so that with the $1,200 included by the revenue agent, the depreciable assets were included therein at a gross value of $35,931.96, but the Commissioner then proceeded to reduce invested capital by accrued depreciation of $33,195.50, so that the depreciable assets were included at a net value of $2,736.46, which is $21,664.20 less than their net book value.

Adding the depreciation of $10,009.46, which was credited to the asset accounts on the books of the Mathis Brothers Co., to the book value of $42,694.82, it is readily apparent that the cost of the depreciable assets was at least $52,704.28; and these same assets are included in invested capital, by the Commisisoner, at a net value of $2,736.46, which is but a mere 5 per cent, approximately, of their cost. It would appear that if the depreciable assets served any useful purpose at all in the petitioners’ businesses, their depreciated value would exceed a paltry 5 per cent of cost, which would appear to be hardly more than their salvage value; and the circumstances in this respect should not be difficult of proof. Yet, the record is entirely void of evidence which would support a finding that the Commissioner erred in his adjustment of invested capital. The only evidence we have is the testimony of the treasurer of the petitioner companies, who testified that in his opinion proper rates of depreciation are 4 per cent for furniture and fixtures and 5 per cent for machinery and equipment; and that an appraisal made in 1913 by an employee showed a then replacement value for the depreciable assets of the Mathis Brothers Co. and the New York Blower Co. of approximately $118,000 and $30,000, respectively. The appraisal, or inventory, was not placed in evidence, the witness explaining that he thought it had been destroyed. We know that the petitioner charged off certain amounts in prior years for depreciation, but we do not have any proof that the amounts charged off even approximated the depreciation actually sustained. We have no idea of what depreciation was sustained and we have no other alternative than to sustain the Commissioner in reducing invested capital by $21,664.20 for inadequate depreciation charged off in prior years.

The third and fourth issues are related and are considered together. At the beginning of the taxable year, Mathis Brothers Co. carried on its books a treasury stock account in the amount of $29,316.26, and an account receivable due from C. W. Rogers, its secretary, in the amount of $7,086.76. The revenue agent eliminated both of these assets from invested capital on the ground that they represented purchases by Mathis Brothers Co. of its own capital stock. Of the total amount eliminated by the agent, $36,403.02, the deficiency notice restored the sum of $17,136.70. Both of these asset accounts represented tona -fide accounts receivable, for loans made by Math is Brothers Co. to its executive officers, to permit those officials to purchase shares of stock of Mathis Brothers Co. from other stockholders, for their own account, and they have been paid in full. The Commissioner erred in failing to include both asset accounts in full in invested capital; and the invested capital shown in the deficiency notice should be increased by the difference of $19,266.32.

The fifth issue is that the Commissioner erroneously reduced invested capital by $1,000, because of alleged appreciation in the book value of the land and buildings of the New York Blower Co. The sixth issue is that he erroneously increased invested capital by $15,768.60, because of an adjustment of the inventory of July 81, 1917. The seventh issue is that he erroneously increased invested capital by $1,600, because of understatement of the income of a preceding year through charging purchases of additional machinery to expense. No evidence was offered of the facts upon which the petitioners rely as sustaining any one of these assignments of error; and we may not disturb the Commissioner’s action.

The eighth issue is that invested capital has been reduced on account of income and profits taxes of prior years erroneously computed. There is no evidence that the taxes for prior years have been erroneously computed; and, except for the fiscal year ended July 31, 1918, we have not the remotest idea as to how those taxes were computed. As to the fiscal year 1918, we have been unable to find any error by the Commissioner in the computation of the tax liability.

The ninth issue is that invested capital has been reduced erroneously by $9,000, on the ground that the New York Blower Co. had included in income of a prior year, and, therefore, in earned surplus, the proceeds from the sale of certain properties which were sold at cost. The evidence shows that the New York-Blower Co. sold certain of its properties in a prior year to the American Clay Co., and that the proceeds of the sale, in the amount of $9,000, were credited to the property accounts and were not included in income and are not, therefore, included in the book surplus at the beginning of the taxable year. The Commissioner’s action is erroneous and is reversed.

The tenth and last issue is that the Commissioner erred in failing to include in invested capital the cost of additions to plant and equipment, totaling $128,065, charged to expense in prior years and disallowed as deductions, in income-tax returns, by the Commissioner. The evidence is not sufficient to support this assignment of error. It consists only of the testimony of the petitioners’ treasurer that additional taxes were assessed for prior years, the reason for which was explained to him by the revenue agent who examined the books for those years as the disallowance of deductions from income of capital expenditures; and that $55,000 was expended in 1913 for special machinery and equipment for producing mail boxes under a Government contract, all of which was charged to expense on the books. There is no evidence in the record that the assets, the cost of which the petitioners ask to have restored to invested capital, were on hand and in use at the beginning of the taxable year; and though the petitioners’ boobs of account were present at the hearings, no attempt was made to identify thereon costs of capital additions charged to expense in prior years. We are unable to find any error on the part of the Commissioner here. '

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

Considered by Morris, Siefkin, and Trammell.


author: Murdock:

text:
    Alexander Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5656.
    Promulgated November 25, 1927.

      George M. Morris, Esq., and John E. Wilson, G. P. A., for the petitioner.

      Harold Allen, Esq., and O. H. Gurl, Esq., for the respondent.
   OPINION.

Murdock:

At the hearing the petitioner moved to dismiss that portion of its petition which related to and claimed a salary deduction of $2,400 for the year 1919, and also to amend the petition to allege that the deduction was a proper one for the year 1920. The motion was granted and the taxpayer was given permission to file an amended petition at the conclusion of the case, setting forth this change. At the request of the counsel for the Commissioner, it was also ordered that the amendments would be considered to have been answered by a general denial on the part of the Commissioner. Thereafter the petitioner tendered an amended petition which included not only the proposed changes but also others not mentioned in any motion to amend. This paper was therefore never filed and is not considered as a part of the record in this case.

The petitioner has not produced sufficient evidence to justify the salary deduction claimed for 1920. The method of bookkeeping and of reporting income used has not been shoAvn. If the cash receipts and disbursements method was used, clearly the petitioner is entitled to no deduction since the $2,400 was not paid until 1925. And even if some other method Avas used whereby the additional salary was incurred we can not say that the deduction should be taken inasmuch as there was no satisfactory shoiving that Moore’s total salary for 1920 was reasonable compensation for services rendered. About the only evidence on this point ivas the statement of one of the directors that Moore was a valuable man. Appeal of The Warren Co., 3 B. T. A. 1154; W. K. Henderson Iron Works & Supply Co. v. Commissioner, 6 B. T. A. 92.

The allegations of the petition which relate to the road built in 1920 at a cost of $8,799.50 and turned over to the county in the same year claim the amount as a loss sustained from the sale of a capital asset. Disregarding the solution of many interesting questions which might arise had some other contention been made on account of this transaction and confining ourselves to the issue raised, we are satisfied that no loss was sustained within the meaning of the loss provisions of section 234(a) of the Revenue Act of 1918. The transfer was purely voluntary on the part of the petitioner. It was not without consideration, since the petitioner was to be relieved of the expense of maintaining the road. We have no reason to believe that the promise of the county commissioners to keep the road in repair did not fully compensate the petitioner for whatever it parted with. The net result of the transfer would seem to have been that the petitioner, although retaining all the advantages which it desired, was relieved of an expensive burden. If the transaction was a gift or a dedication to public uses the petitioner would not be entitled ipso facto to deduct anything from its income as a loss.

The remaining contention of the petitioner is that it should be allowed to deduct as an ordinary and necessary expense a portion of the money spent in each year on the roads and sidewalks of its mill village. It admits that some of the money was spent in the acquisition of capital assets and the Commissioner admits that a part of the total expenditures of each year was deductible as an ordinary and necessary expense of that year. The difficulty has been to properly divide the total amounts between the two classes of expenditures.

To prove the amount to be allocated to expense the petitioner asks us to adopt an engineer’s estimates of the amounts which should have been spent in acquiring capital assets and then to subtract these amounts from the known totals spent in each year to arrive at the proper deductions. We do not know why such a roundabout method of proof was employed, but we are not primarily concerned with the method of proof. Our problem is to decide what facts have been proven and what follows as a matter of law from the facts.

In this case we are asked to infer the ultimate fact, the amount actually spent for repair, from an opinion as to how much of the total should not have been so spent. We are satisfied that the amount given in this opinion approximates the amount spent for the original road system and permanent improvements to it. But the engineer admitted on cross-examination that during 1921 it would have cost from $5 to $6 a day to hire a team of horses for this kind of work arid that he had used $5 in his estimates. It was also brought out that the ground had to be cleared of trees, a fact which the engineer does not seem to have considered.

In view of the circumstances we have serious doubts about one-half of the total expended in each year representing expense. We think that the petitioner spent at least $4,000 in 1921, and $4,000 in 1922, for repairs, which amounts it is entitled to deduct from its income of the respective years as ordinary and necessary expenses.

Judgment will be entered in accordance with the foregoing opinion on notice of 15 days, under Bule 50.

Considered by Mourns and Trammell.


author: GeeeN :

text:
    Union Bed & Spring Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11567.
    Promulgated November 25, 1927.

      O. R. Folsom-Jones, Esq., for the petitioner.

      James A. O' Callaghan, Esq., for the respondent.
   OPINION.

GeeeN :

The petitioner claims as a deduction from its gross income, a loss of $31,058.54, which it is alleged was sustained during the taxable year 1920. It is a manufacturer of beds and springs. Due to the cancellation of its lease it was forced to secure new quarters. It was decided to purchase a plant and after an extensive search, it purchased, on September 2,1920, a tobacco warehouse which its officers thought would serve the petitioner’s purpose with but minor alterations. It paid $94,500 for the land and $245,500 for the building. It was estimated that the necessary alterations would cost about $15,000. Almost immediately after the purchase, however, it became apparent, after consulting an architect, that the remodeling would cost considerably more than had originally been estimated. The alterations were made at a cost of $129,465.21. During the course of remodeling, certain of the material contained in the warehouse when purchased, had to be scrapped. The reproduction cost new in 1920, less salvage and depreciation of such junked material, was $31,058.54. Testimony was introduced to show that the value of the building after the alterations had been completed, was no more than $307,000. The original cost of the building plus alterations amounted to $374,965.21, or $67,965.21 more than it was worth. The petitioner is not asking for a loss of the $67,965.21, but contends that it did sustain a loss in at least the amount of $31,058.54 representing certain brick, roofing, iron doors, screens, etc., of the old building, which had to be discarded.

The deduction is claimed under section 234(a) (4) of the Eevenue Act of 1918, which is as follows:

Sec. 234. (a) That in computing tlie net income of a corporation subject to tbe tax imposed by section 230 there shall be allowed as deductions:
*******
(4) Dosses sustained during the taxable year and not compensated for by insurance or otherwise.

In Appeal of Arthur S. Ingle, 1 B. T. A. 595, the taxpayer, in 1917 and 1918, purchased certain lands and buildings and later in 1918 wrecked the building intending to put up other buildings which would yield him' a greater return on his investment. After the buildings had been removed, business conditions over which the taxpayer. had no control compelled him to abandon for the time being bis proposed plan of improving the property. It was held the taxpayer had not realized a loss within the meaning of the taxing statute. Compare Manning, Cognets & Graves v. Commissioner, 7 B. T. A. 286, and William Ward v. Commissioner, 7 B. T. A. 1107, wherein it was held that the unextinguished cost of buildings remodeled in order to obtain a lease upon the land represented the cost to the lessor of such lease.

The petitioner cites the cases of First National Banh of Evanston, Wyoming, 1 B. T. A. 9; Wigwam Amusement Co., 1 B. T. A. 335; Simmons & Hammond Manufacturing Co., 1 B. T. A. 803; Burnside Steel Co., 3 B. T. A. 20; Steinbach Co., 3 B. T. A. 348; Mandel Brothers, 4 B. T. A. 341; First National Bank of Goodland, Kansas, 5 B. T. A. 1174; and Treat Hardware Corporation v. Commissioner, 6 B. T. A. 768. In each of the foregoing cases where the unextin-guished cost of the building was allowed as a deduction, the taxpayer did the remodeling on premises which had been used in its business for several years prior to the year in which the reconstruction work was done. The petitioner at the time it acquired the tobacco warehouse, knew that it could not use such warehouse in its business until certain necessary alterations had been made. It knew at the time it purchased the building that some material would have to be’ discarded in making the alterations. To our minds it is immaterial that the actual alterations necessary were considerably greater than were in contemplation at the time of purchase. Their cost was a part of the cost incident to the acquisition of a new plant. We are of the opinion that the petitioner did not sustain any deductible loss on account of the materials discarded. The cost of the building to be capitalized on the petitioner’s book is the original purchase price of $245,500 plus the cost of alterations in the amount of $129,465.21, less salvage.

We are of the further opinion that even were the petitioner entitled to a loss of the discarded materials, it has not proven the proper basis upon which such loss could be determined.

In the instant case, the basis upon which the alleged loss is claimed is the reproduction cost new at 1920 market prices of the material' discarded less salvage and depreciation. The proper basis, even if the petitioner’s theory of a loss were correct, would have been the portion of the purchase price properly allocable to the demolished portion of the building.

Judgment will be entered for the respondent.

Considered by StehNhageN and AuuNdell.


author: SiefKIN :

text:
    Union Health & Accident Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 17991.
    Promulgated November 25, 1927.

      Saviuel E. Marshall, Esq., for the petitioner.

      Granville 8. Borden, Esq., for the respondent.
   OPINION.

SiefKIN :

The only evidence of March 1, 1913, value, aside from exhibits showing income from the various sources, disbursements and dividends, as set out in our findings of fact, was the opinion testimony of a qualified expert. This witness was given exhibits showing income disbursements and dividends and asked if he could express an opinion as to the relative values on March 1, 1913, and the date of sale of the property sold in 1921. His answer was that he could express such opinion and that he thought the property sold was worth no more in 1921 than it was in 1913. On cross examination he admitted the basis of his opinion to be faulty in that factors not before him would affect the values in question. Obviously such an opinion, standing alone, has little weight in determining values as of the basic date.

It does not require extended discussion to point out deficiencies in evidence necessary to an independent conclusion on our part as to March 1, 1913, values. Petitioner urges that what it sold was a policy list, together with the data necessary to enable the purchaser to acquire and hold the business it represented and that such asset, though fluctuating, was in existence at the basic date. Petitioner apparently considers the income shown under the head “underwriting net income” to be the principal factor in determining the value of the assets sold. Because the assets sold for $16,410 in 1921, despite losses in underwriting income in 1918, and 1920, petitioner would have us conclude that the March 1, 1913, value was at least $16,410, despite the fact that there were losses in underwriting income for the three years preceding the basic date. It may well be true that the properties sold had a value despite said losses in 1913 as well as in 1921, but such values might have been due to other factors or conditions which we can not assume remained constant over so long a period of time.

Nor are the amounts shown as investment income for the various years helpful in finding the value in question, as the invested assets were not sold, and we are not informed as to what extent the investments represent income derived from the business. We do not think the evidence sufficient to overcome the presumption of correctness inhering in respondent’s determination.

Judgment will he entered for the respondent.

Considered by Trammell, Morris, and Murdock.


author: Siefkin:

text:
    McAnelly Hardware Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11422.
    Promulgated November 26, 1927.

      A. F. BritneTl, Esq., for the petitioner.
    <7. H. Gurl, Esq., for the respondent.
   OFINION.

Siefkin:

We are confronted in this case with the necessity of determining which of two erroneous methods is most nearly correct. Although petitioner purported to show an invested capital and details of gross income and net income it now says that its income, determined upon a net worth theory is considerably less than that which its officers swore to in its return. Petitioner admits that the books were incorrectly kept but insists that it is possible to arrive at the true net income by comparing the net worth at the beginning and end of the taxable period, and insists that the figures making up such computations can be accurately ascertained from the books. The only witness for petitioner was the assistant secretary-treasurer of the company, who was not with the company during the year in question and who testified to what the records showed and pointed out certain errors, but did not attempt to show, and could not show, whether the books as thus corrected reflected actual facts.

On the other hand, we are asked to approve a deficiency asserted by respondent which he admits is based upon the so-called percentage method in arriving at a net income of $15,345.77 and special assessment applied to that figure. Although petitioner reported a net income of $13,548.94 and a tax thereon of $1,117.24, respondent’s application of special assessment to a net income results in a deficiency of $1,953.98, a greater amount than his increase in net income.

Under section 212 (b) of the Eevenue Act of 1918 it is the Commissioner’s duty, if the petitioner’s system of accounting does not clearly reflect income, to compute the tax “upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income.” The burden of showing such action is incorrect is on the petitioner and we are of the opinion that the burden has not been met. The situation is similar to that considered in E. Muelhoefer & Son v. Commissioner, 4 B. T. A. 586, where we said:

In regard to the records which petitioner claimed to have, correctly reflecting its income, it was clearly incumbent upon it to disclose their contents to the Board in order that it might he in a position to judge of the correctness or otherwise of the Commissioner’s determination.
In the absence of such records or of any available evidence of the items entering into the computation of the petitioner’s income and disbursements during the year, the Board is manifestly unable to conclude just what the income really was, and is therefore not in a position to say that the determination of the Commissioner was erroneous.

See also F. G. Bishoff v. Commissioner, 6 B. T. A. 570.

Judgment will he entered for the respondent.

Considered by Littleton, Trammell, Morris, and Murdock.


author: Geeen:

text:
    O. J. Erickson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8972.
    Promulgated November 26, 1927.

      R. W. Parliman, Jr., for the petitioner.

      W. F. Gibbs, Esq., for the respondent.
   OPINION.

Geeen:

The petitioner contends that, inasmuch as article 305 of Regulations 65 provides that the exemption to which a married person living with husband or wife is entitled, will be prorated according to the period during which the taxpayer occupies such status, he is entitled to have article 305 of Regulations 45 similarly construed even though it contains no comparable provision. It is sufficient to say that this provision of Regulations 65 is in accordance with the provisions of section 216(f) (2) of the Revenue Act of 1924, where for the first time the statute made provision for prorating the exemption in case of change of status.

Section 216 of the Revenue Act of 1918, insofar as is here material, reads as follows:

That for the purpose of the normal tax only there sliaE be allowed the following credits:
* * * * * #
(c) In the case of a single person, a personal exemption of $1,000, or in the case of the head of a family or a married person living with husband or wife, a personal exemption of $2,000: A husband and wife living together shall receive but one personal exemption of $2,000 against their aggregate net income; and in case they make separate returns, the personal exemption of $2,000 may be taken by either or divided between them.

Article 305 of Regulations 45 reads, in part, as follows:

The status of the taxpayer on the last day of his taxable year determines his right to an additional exemption and to a credit for dependents. * * * But an unmarried individual or a married individual not living with husband or wife, who during the taxable year has ceased to be the head of a family or to have dependents, is entitled only to the personal exemption of $1,000 allowed a single person.

Article 305 does not differ materially from the previous regulations and rulings of the Commissioner and represents the established practice of the Bureau under the Revenue Act of 1913 and subsequent acts up to and including the Revenue Act of 1921.

We regard the regulation as a reasonable construction of section 216(c) and we see no merit in the petitioner’s contention. We accordingly hold that the respondent’s action in allowing the petitioner a credit of only $1,000 is correct.

The petitioner further contends that the statute of limitations has run. It is provided by section 277 (a) (3) of the Revenue Act of 1926, that taxes imposed by the Revenue Act of 1918 shall be assessed within five years, and by section 217 (b) that such period shall be extended by the time for which the running of the statute is suspended. Section 274(a) of the same Act suspends the statute pending a final determination of a proceeding before this Board. We accordingly affirm the Commissioner in this respect.

Judgment will be entered for the respondent.

Considered by Stjernhagen and Arundell.


author: MoRRis:

text:
    Texas & Pacific Railway Co., John L. Lancaster and Charles L. Wallace, Receivers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9863.
    Promulgated November 28, 1927.

      Chester A. Gwirm, Esq., for the petitioner.

      M. IV. Fisher, Esq., for the respondent.
   OPINION.

MoRRis:

The first assignment of error, the only one urged by petitioner, relates to the action of the respondent in increasing net income of the petitioner for the years 1918 and 1919 by $1,912.34 and $46,514.13, representing so-called donations made to the petitioner by private individuals and corporations located on its right of way for the building and installation of spur tracks and other facilities.

At the request of shippers located on property adjacent to the right of way of the petitioner, spur tracks and other facilities were installed under written agreements entered into between the parties requiring said persons or corporations to pay for and maintain said spur tracks, and facilities, and providing further, that the title to that portion of said facilities installed on the right of way of the petitioner should be in the petitioner upon completion. During the years here under consideration, petitioner entered into such agreements and had entered upon its books of account $1,912.34 in 1918 and $46,514.13 in 1919, representing payments to the petitioner by private individuals and corporations for the cost of materials and labor expended by it or by such private individuals and corporations in building spur tracks under the agreements above mentioned. Appropriate book entries as required by the rules of the Interstate Commerce Commission were made to record these transactions, the net effect of which being to debit General Balance Sheet Account No. 701 and credit General Balance Sheet Account No. 779 “Additions to Property Through Income and Surplus.” The respondent contends that the acquisition by petitioner of that portion of the spur tracks and facilities installed on its right of way without cost to it, was income derived by it from the furnishing of services such as it was organized to furnish. The petitioner contends, however, that such donations contained no element of gain and do not constitute taxable income within the meaning of the statute and the decided cases.

The petitioner relies upon the Appeal of Liberty Light & Power Co., 4 B. T. A. 155, and Edwards v. Cuba Railroad Co., 268 U. S. 628. The respondent’s counsel attempts to distinguish the Cuba Railroad Co. case, supra, from the instant case in that the money and property was acquired from the Government as a subsidy. He also attempts to distinguish the Liberty Light & Power Co. case, supra, from the instant case by reason of the fact that the Board found that that company was under compulsion to accept properties offered to it by its patrons and by the further fact that the Board held that the additional cost of rendering services to certain country lines of that company was recognized, and it was therefore entitled to charge higher rates for such services. Since the hearing of this case, the Board has promulgated its decision in Great Northern Railway Co., 8 B. T. A. 225, which renders it useless for us to consider the distinctions attempted to be drawn by the respondent’s counsel. The facts in the instant case are practically identical with those in the Great Northern Railway Co., supra, in which the Board, following the decisions in Liberty Light & Power Co. and Cuba Railroad Co., supra, held that contributions received in the aid of construction during 1918 and 1919 did not constitute taxable income to the petitioner. Therefore, considering the merits of the instant case and under authority of Great Northern Railway Co., supra, we are of the opinion that the respondent was in error in including the sums of $1,912.34 and $46,514.13 in the income of the petitioner for the years 1918 and 1919, respectively.

The second assignment of error affirmatively pleaded- in respondent’s answer is that he erred in failing to disallow a deduction in the amount of $2,589.55 taken by the petitioner for 1919 representing payment of a certain assessment to the Association of Railway Executives. During the year 1919 there was in existence an organization known as the Association of Railway Executives. Petitioner received a communication from that Association bearing date October 16,1919, transmitting a report on a proposed plan of national advertising by the Association and for a special assessment of its members therefor. Petitioner received a further communication from that Association bearing date November 1, 1919, assessing it $2 per $1,000 of standard return,” or a total amount of $8,286.56, to be paid one-half immediately and the remainder in two. installments during the year 1920. Petitioner paid the Association one-half of the above sum, or $4,143.28, in 1919, which it deducted in the computation of its net income for that year. The respondent now contends that ten-sixteenths of that amount, or $2,589.55, should be disallowed as a deduction on the ground that it was paid to the Association for the purpose of advertising and publicity in connection with pending legislation.

Although the evidence does not disclose when the Association of Railway Executives was organized, we understand that it was in operation some time prior to the taxable years and its purposes and policies were no doubt well established. We do not know, except in a very general way what the business of the Association is, nor for what purpose it was organized. Of course, we know that the $1,000,000 which was assessed was for the purpose of carrying on a certain advertising campaign, but we do not know, even in a general way, just how this money was expended if it was in fact expended. We are not informed of liow this expenditure was treated in the books of account of the petitioner for the year 1919. In order for us to determine whether this sum is an ordinary and necessary business expense within the meaning of the statute, we should know something about the organization to which this money is paid, what its purpose is, what it is in fact doing, its relationship with the petitioner, and we should know something about how this money was in fact spent. Under the authority of Great Northern Railway Co., supra, we do not believe that the respondent has offered sufficient evidence to support the affirmative allegation set up in his answer that the amount deducted was not an ordinary and necessary business expense.

At the hearing of this proceeding petitioner’s counsel conceded the correctness of respondent’s contentions with respect to the third allegation of error affirmatively pleaded in the respondent’s answer. Taxable income for the years 1918 and 1919 should therefore be increased by $27,549.38 and $40,113.93, respectively, amounts by which the petitioner over-accrued interest owing by it.

The fourth and last assignment of error, affirmatively pleaded by the respondent’s answer, is that he erred in including in income of the petitioner for the years 1918 and 1919 the sums of $47,916.95 and $158,159.37, respectively, representing rental interest on additions and betterments completed during Federal control. The respondent contends that the rental interest on these completed additions and betterments was not accruable in the years 1918 and 1919 but was taxable income in the year 1923, the date of final settlement with the Director General of Railroads.

On July 21, 1919, the Director General of Railroads, acting on behalf of the United States and the President, under the powers conferred by the proclamations of the President, entered into an agreement with the petitioner with respect to the “ possession, control, operation and utilization ” of its properties, and the compensation therefor, during the period of Federal control. The preamble and recitals of that agreement contained the following provision:

Whereas by proclamation dated March 29, 1918, the President, acting under the Federal Control Act and all other powers him thereto enabling, authorized the Director General * * * to agree with the carriers, * * * upon the amount of compensation to be paid pursuant to law, and to sign, seal, and deliver in his own name or in the name of the President, or in the name of the United States such agreements as may be necessary and expedient with the several carriers * * * respecting compensation.

The amount of compensation guaranteed to the petitioner under the agreement of July 21, 1919, supra, is $4,107,432.49, over which amount there is no dispute in this proceeding. The amounts here in controversy are the payments provided for in subdivision (d) of section 7 of that agreement, which reads :

Upon the cost of additions and betterments, less retirements in connection therewith, and upon the cost of road extensions, made to the property of the Company during Federal control, the Director General shall, from the completion of the work, pay the Company a reasonable rate of interest, to be fixed by him on each occasion. In fixing such rate or rates he may take into account not merely the value of money but all pertinent facts and circumstances * * *.

Section 212(b) of the Revenue Act of 1918 provides that:

The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer * * • or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income.

The books of the petitioner were kept on the accrual basis in accordance with the regulations promulgated by the Interstate Commerce Commission.

In Appeal of Illinois Terminal Co., 5 B. T. A. 15, the United States took over the properties of that company under conditions similar to those in the instant case, except that in that case no agreement was entered into as was done here. After the close of the period of Federal control that company filed a claim for compensation, and in 1922 it was awarded a sum of $390,818.05, which amount was included in its tax return for 1922. The Commissioner, on the other hand, prorated that amount to the years 1918, 1919, and 1920, the period of Federal control, and assessed additional taxes for those years. The petitioner appealed to this Board from the findings of the Commissioner, and the Board held upon finding that the books were kept on the accrual basis that the amount of compensation received should be prorated to the years there in question.

In Appeal of New Orleans, Texas & Mexico Railway Co., 6 B. T. A. 436, that company did not sign a compensation agreement, but filed an application with the Director General of Railroads for compensation in excess of the “ standard return.” In 1921 it was finally agreed that the company should be paid compensation in the amount of $1,500,000, annually. That company included in its original return for 1918, $1,101,215.32, the amount of the so-called standard return as certified by the Interstate Commerce Commission, but subsequently to the agreement reached between that company and the Director General of Railroads, that company filed an amended return for that year and included the entire amount of $1,500,000. The Commissioner excluded the difference between those amounts from the return for 1918, and added it to the income of the company for 1921. The Board, in that case, following Appeal of Illinois Terminal Co., supra, held that the taxpayer was correct in including the entire amount in the year 1918.

While the two preceding appeals do not involve the question of interest upon costs of additions and betterments, and differ in that respect from the facts of this case, we are convinced that the interest paid under the circumstances of this case should be governed by the same considerations — in fact the interest so provided for is, we believe, in fact and in law, nothing more nor less than a part of the “ just compensation ” sought to be paid under section 4 of the Federal Control Act as amended March 21, 1918 (40 Stat. 451).

Counsel for the respondent lays great stress upon the proposition that the interest on additions and betterments was a mere claim against the United States, unliquidated as to amount, and, therefore, could not be accrued as income until the amount was actually determined in 1923, but in view of the Appeals of Illinois Terminal Co. and New Orleans, Texas & Mexico Railway Co., supra, we are not impressed with his contentions. The amounts in controversy in those cases were undetermined until some time after the period of Federal control, and notwithstanding that fact, the Board held that they should be allocated to the years in which earned.

In Great Northern Railway Co., supra, the contract between the petitioner in that case and the Director General provided:

Sec. 4. (a) * * * Balances of the above accounts shall be struck quarterly on the last days of March, June, September, and December of each year, and the cash balance found on such adjustments to be due either party shall be then payable and, if not paid, shall bear interest at the rate of 6 per cent, per annum, unless the parties shall agree upon a different rate. * * *.

No quarterly balances were struck between the Director General and the petitioner, and the only settlement of account made between them was the final settlement in April, 1921. The petitioner in that case accrued the sum of $1,570,199.75 for the year 1919, representing the estimated amount of interest due under the provision of' the contract aforesaid, which amount it reported as taxable income for that year, but accrued nothing for 1918. The respondent in that case computed the amount of interest due the petitioner from the Director General for 1918 to be $693,005.39 and for 1919 to be $351,764.86 and in the determination of the proposed deficiency in that case, the respondent added $693,005.39 to the taxable income of the petitioner for the year 1918 and reduced the taxable income for the year 1919 in the sum of $1,218,434.89. The petitioner contended in that case that it should be permitted to report its income from this source in accordance with its books. The Board held in that case following Appeal of Illinois Terminal Co., supra., that the respondent was correct in allocating these amounts to the years in which earned.

Under the facts and circumstances in this case and considering the cases herein cited, the sums of $47,916.95 and $158,159.37 were correctly included in the petitioner’s income for the years 1918 and 1919, respectively, instead of the year of final settlement as contended by the respondent.

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

Considered by Muedock and Siefkin.


text:
    H. H. Roberts, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9579.
    Promulgated November 28, 1927.

      H. H. Roberts pro se.

      Thomas M. Wilkins, Esq., for the respondent.
   OPINION.

MoRRis:

We are satisfied from the evidence that the petitioner is entitled to the deduction claimed as traveling expenses for 1920. It is apparent from the testimony that he expended at least the amount claimed during the year in soliciting orders. A mathematical computation will show that the total of the items of expense set out above amounts to more than the claimed deduction. In addition there were other expenses testified to which could not be determined as to their actual amount.

Judgment will- he entered for the petitioner.

Considered by Murdock and Siefkin.


text:
    Foer Wall Paper Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10103.
    Promulgated November 28, 1927.

      Lawrence Koenigsberger, Esq., for the petitioner.

      W. H. Lawder, Esq., for the respondent.
   OPINION.

MoRRis:

The first question presented is whether certain expenditures were for capital items or for ordinary and necessary repairs. In Appeal of Illinois Merchants Trust Co., Executor, 4 B. T. A. 103, we pointed out the difference between capital items and ordinary and necessary expenses in the following language:

In determining whether an expenditure is a capital one or is chargeable against operating income, it is necessary to bear in mind the purpose for which the expenditure was made. To repair is to restore to a sound state or to mend, while a replacement connotes a substitution. A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition. It does not add to the value of the property, nor does it appreciably prolong its life. It merely keeps the property in an operating condition over its probable useful life for the uses for which it was acquired. Expenditures tor that purpose are distinguishable from those for replacements, alterations, improvements or additions which prolong the life of the property, increase its value, or make it adaptable to a different use. The one is a maintenance charge, while the others are additions to capital investment which should not be applied against current earnings.

Under the facts in this case the addition of a new concrete cellar, and the alteration and improvement of the store front, and the installation of new plate glass windows constituted capital expenditures and are not deductible. The cost of mending leaks and plastering were repair items which should be deducted from current income.

The second error assigned was that respondent erroneously added to income $6,710.11 representing a bad debt owing from the petitioner’s president. The deduction is now claimed either as a bad debt or as additional compensation. Under either claim we are satisfied that petitioner is not entitled to the deduction. For a number of years prior to and during the taxable year in question the petitioner advanced money to its president for the payment of his personal indebtedness. The amounts so advanced were charged to his personal account and carried as an account receivable. During 1920 his account was debited with $13,923.57 and credited with $3,828.02, making a debit balance at the end of the year of $10,095.55, of which amount $6,710.11, the item in controversy, was charged to profit and loss and the balance was carried forward to the year 1921. The record is silent as to any demand which may have been made on Foer to pay the debt, or as to any efforts on the part of the petitioner to collect the amount charged off. Substantial jjayments were made on the account during 1920. Only a part of the debit balance was charged off and additional advances and payments were made during 1921. These facts m our opinion are not consistent with the petitioner’s contention that $6,710.11 was a bad debt ascertained to be worthless.

The evidence does not support the alternative proposition that the amount constituted additional compensation. It was carried as an account receivable. Foer drew an authorized salary of $2,600 per annum and it was testified that those interested in working out the affairs of the business were endeavoring to keep salaries at a minimum. There is no showing of any additional salary authorization or that the services rendered by Foer entitled him to any amount in excess of $2,600. We are therefore of the opinion that the amount of $6,710.11 is not an allowable deduction.

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

Considered by Muuuock and Sieekht.


author: MoeRis:

text:
    August Grill, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7372.
    Promulgated November 28, 1927.

      Joseph Kopelman, Esq., for the petitioner.

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

MoeRis:

The petitioner seeks a paid-in surplus for depreciable assets which were paid in for stock in June, 1914, and asserts that respondent has erroneously computed its depreciation deductions.

Section 326 (a) (2) of the Revenue Act of 1918 provides:

That as used in this title the term “invested capital” for any year means * * *:
>fi * ' $ & ‡ $ *
(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: * * *

Considerable difficulty has been encountered in the determination of the questions involved in this proceeding due to the fact that the only evidence of value presented as to some of the assets was the cost of reproduction new in June, 1914, the time such assets were acquired by the petitioner. Obviously such cost is not the equivalent of actual cash value or fair market value of a depreciable asset which has been in existence for a number of years, and when reduced by depreciation from date of acquisition, it is merely evidentiary, and not sufficient, in the absence of other evidence to overcome the •prima fade correctness of the respondent’s determination. See Appeal of Rockford, Malleable Iron Works, 2 B. T. A. 817; Appeal of Sphar Brick Co., 2 B. T. A. 946; Appeal of McIntosh & Seymour Corporation, 2 B. T. A. 953.

In the case of certain other assets acquired by the petitioner at the date of its incorporation, we have found their value at that time, but we have no evidence of the date of their acquisition by Grill, from whom the petitioner received them, their condition or probable useful life in 1914. As the questions involved are the amount of depreciation to which the petitioner is entitled for the taxable years in question and the amount to be included in invested capital for these depreciable assets, the failure to adduce evidence on the above factors is fatal to the petitioner’s contentions. Evidence of the probable useful life of similar assets is not sufficient when the date of the beginning of that life for the assets in question is unknown.

For the foregoing reasons we are unable to make any determination as to the invested capital or depreciation to which the petitioner may be entitled on the following assets: the two ice houses, the ice boat — upon which we found a value of $1,500 when turned in to the petitioner, the nine and six-room dwelling houses, the two barns, and the office building located in Brooklyn.

The evidence indicates, however, that as to certain of the assets, the respondent was clearly in error as to the amount of invested capital and depreciation allowed thereon for the taxable years in question. He computed invested capital of $10,500 and $10,100 on the depreciable assets and allowed depreciation at the rate of 10 per cent on said amounts. To the extent that the total of the following items exceeds the amounts allowed by the respondent, invested capital should be increased. Four ice boats which were constructed in 1895 had a value of $12,000 in June, 1914, when acquired by the petitioner. Their useful life was 30 years. Their depreciated value based on their June, 1914, value and remaining useful life from that date, should be included in invested capital and depreciation allowed for the years 1918 and 1919 on that basis. The depreciated value of the 8-room house, having a value in June, 1914, of $5,000 and a 60-year life from 1908, should be included in invested capital, said depreciated value being based on June, 1914, value and the remaining useful life from that date. Depreciation should be computed on that basis for the taxable years in question. Certain miscellaneous equipment, such as plows, saws, hooks, etc., having a value at date of acquisition of $1,000, and an ice bridge with hoist and motors located in Brooklyn and having a value of $1,000 were part of the assets acquired by the petitioner and, allowance being made for depreciation at an annual rate of 10 per cent, should be included in invested capital and depreciation allowed thereon for 1918 and 1919. Invested capital should be further increased by the additional amounts of $2,000, which was expended for the construction of a road which was on the property when acquired by the petitioner, and $8,260.49 for the dredging of an artificial pond, which improvements were used during the taxable years and increased the value of the property at date of acquisition to that extent.

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

Considered by Murdock and Sieekin.


author: MuRdock:

text:
    Workingman’s Cooperative Association of the United Insurance League of New York, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9067.
    Promulgated November 28, 1927.

      H. B. Salisbury, for the petitioner.

      D. D. Shepard, Esq., for the respondent.
   MuRdock:

The Commissioner has determined that there is a deficiency of $4,970.30 in the petitioner’s income and profits taxes for the calendar year 1920. The petitioner contended in its original petition that it was exempt from taxation by section 231 of the Revenue Act of 1918. We have already decided this same contention adversely to the petitioner in its appeals from the Commissioner’s determinations of its tax liability for the years 1918 and 1919. See Appeal of Workingman’s Cooperative Association, 3 B. T. A. 1352. The petitioner admits that the reasoning of that decision would apply with equal force as to the same question for the year 1920. It therefore moved and was permitted to amend its petition. Although the petition and the amended petition do not clearly set forth the petitioner’s contention, from a consideration of these papers and the argument presented at the hearing and in the brief, we believe that the petitioner is seeking to deduct some amount from its gross income by virtue of the provision of section 234 (a) (11) of the Revenue Act of 1918, which allows the following deduction:

In the case of corporations issuing policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan continuing for life and not subject to cancellation, in addition to the above, such portion of the net addition (not required by law) made within the taxable year to reserve funds as the Commission finds to be required for the protection of the holders of such policies only.

The petitioner also contends that it did not have gross income within the'meaning of section 213 (a) of the Revenue Act of 1918, and in its brief it quotes a portion of that section to support its contention. We are satisfied, that the section, read in its entirety, completely refutes the petitioner’s argument.

The by-laws of the corporation provide that its funds, “ after the payment of all claims remaining in the hands of the treasurer, shall be credited to the guaranty fund and shall be held in reserve and may be invested by the board of directors on bond and mortgage and keep so invested without declaring a dividend so long as the board shall deem best and for the best interests of the company.” A witness stated that no dividend had ever been declared and that all surplus was held in a reserve fund. It appears that some, but not all, of the petitioner’s policies covered life, health, and accident insurance combined in one policy. The petitioner’s books were not produced or offered in evidence and we do not know what amount was added to its reserve funds during 1920. But were we to assume that all of the income of the year was added to its reserve funds, still we would not be justified in disturbing the determination of the Commissioner, because we do not know what amount, if any, the latter allowed as a deduction under section 234(a) (11) and we have before us no satisfactory evidence of any amount which would be a proper deduction under this provision of the Act.

Judgment will he entered for the respondent.

Considered by MoRRis and Siefkin.


text:
    Ice Service Co., Inc., and National Ice & Coal Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8930.
    Promulgated November 28, 1927.

      Harry Schwartz, Esq., and Theodore R. Benson, Esq., for the petitioners.

      J. Harry Byrne, Esq., for the respondent.
   OPINION.

Murdock:

The petitioners allege that the Commissioner erred in refusing to permit them to make a consolidated return as affiliated corporations within the meaning of section 240(c) of the Revenue Act of 1921.

The section in question prescribes the requirements for affiliation as follows:

Sec. 240. (c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all of the stock of the other or others, or (2) if substantially all of the stock of two or more corporations is owned or controlled by the same interests.

In interpreting the statute and its kindred provision of the Revenue Act of 1918, it has been held that there must be full and complete control of substantially all the stock and that this control must be a genuine one actually exercised. Appeal of Isse Koch & Co., 1 B. T. A. 624; Appeal of Cleveland & Mahoning Valley Railway Co., 4 B. T. A. 1040; Benjamin Electric Manufacturing Co. v. Commissioner, 6 B. T. A. 1204. Control of the business of a corporation is not control of its stock, within the meaning of the statute, and where there is control of a corporation’s business, but there are quiescent stockholders present, representing a sizeable minority, such business control does not amount to the control of substantially all of the stock. Appeal of Watsontown Brick Co., 3 B. T. A. 85.

After January 10, 1921, the Ice Service Co., Inc., owned approximately 68 per cent of the stock of the National Ice & Coal Co. but we have frequently held that this fact, standing alone, is not sufficient to constitute statutory ownership or control of substantially all the stock. Appeal of Associated Gas & Electric Co., 2. B. T. A. 263; Park Bros. & Rogers, Inc. v. Commissioner, 6 B. T. A. 719; Appeal of Goldstein Bros. Amusement Co., 3 B. T. A. 408. By the end of the year the Ice Service Co., Inc., had increased its ownership in the other company to 75.3 per cent, but we do not know the dates when the additional shares were acquired.

The petitioners assert, nevertheless, that the minority stock was controlled by the Ice Service Co. Inc., due to the fact that by purchase oí claims against the National Ice & Coal Co. and by endorsement of its notes a total indebtedness from the latter company to the former was created in the sum of $217,342.46, and that as a creditor in such a large amount and because the minority stock was owned by scattered stockholders, the Ice Service Co. Inc., could control the payment of dividends to the minority stockholders and render the voting rights of their stock of no effect.

We do not think that the above facts warrant the conclusions which the petitioners attempt to draw therefrom. The Ice Service Co. by its purchase of claims and endorsement of notes was a creditor of the National Ice & Coal Co. in a large amount, but it does not follow that for this reason it could control the payment of dividends upon the corporation stock to a greater extent than any other creditor possessing a similar claim but not a stockholder. And even assuming that the position of a creditor permits one to press his claim and thus possibly to defeat the right of a stockholder to receive dividends, this does not constitute control of a minority stockholder’s stock. He still has the right to vote his stock and thus oppose the wishes of the majority if he so desires. True, the votes of the minority will not determine the policies of the corporation when the majority of the voting shares is held by one individual or corporation, but such control of the policies and financial affairs of the corporation as an entity does not amount to control of the individual stockholder or his stock. There must be a control of the voting rights. Appeal of Canyon Lumber Co., 1 B. T. A. 473; Adaskin-Tilley Furniture Co. v. Commissioner, 6 B. T. A. 316.

The petitioners also rely upon the facts that two of the officers of the Ice Service Co. were elected president and vice president, respectively, of the National Ice & Coal Co. soon after the stock purchase; that each company had the same general counsel; and that a purchasing agent was appointed by the Ice Service Co. board to act for that corporation and its subsidiaries. It does not appear whether the purchasing agent did, in fact, act for the National Ice & Coal Co., or whether the resolution intended that he should do so, but even supposing that he did purchase for both companies, still the fact that certain officers of the one company were officers of the other, standing by itself, does not show control of minority stock either by the Ice Service Co., or by the same interests.

Judgment will be entered for the respondent.

Considered by Moekis and Siefkin.


author: Mtjedook :

text:
    Davidson Grocery Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10072.
    Promulgated November 28, 1927.

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

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

Mtjedook :

The petitioner claims the right to deduct from his gross income for the year 1919 an alleged loss of $1,000 sustained upon an open account with R. F. Passmore, trading as Capitol Grocery, the total amount of this account on petitioner’s books on December 31, 1919, being $8,453.78. The sum of $1,000 represented an amount which petitioner’s president, after investigation at the end of the taxable year, had determined the corporation would lose on the R. F. Passmore account.

The pertinent part of the Revenue Act of 1918, reads as follows:

Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: *******
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise;
(5) Debts ascertained to be worthless and charged off within the taxable year.

In a long line of cases beginning with the Appeal of Steele Cotton Mill Co., 1 B. T. A. 299, we have held that part of a debt can not be ascertained to be worthless and charged off under the Revenue Act of 1918. Section 234(a) (5) of the Revenue Act of 1921, for the first time allowed a debt to be charged off in part where and to the extent that it was recoverable only in part. The record does not show that any loss was sustained during the taxable year. Apparently the petitioner did not feel that the loss had been sustained in that year for in his testimony we find the following:

X liacl known for some time that Mr. Passmore was in pretty bad circumstances and I had investigated pretty closely at that particular time as to how much he owed and his assets and from the information I got, I felt sure that we would have a one thousand dollar loss on that account. * * *

This petitioner finds himself in a dilemma in regard to his alleged deduction. He is not entitled to deduct the $1,000 either as a bad debt or as a loss. See Appeal of Carl Muller, 4 B. T. A. 169.

Judgment will be entered for the resfondent.

Considered by MoRris and Siefkin.


author: Muedook :

text:
    Bauer Brothers Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8575.
    Promulgated November 28, 1927.

      H. A. Mihills, O.P. A., for the petitioner.

      George G. Witter, Esg., for the respondent.
   OPINION.

Muedook :

The respondent apparently concedes that these bonuses were reasonable compensation for personal services actually rendered, but denies that all or any portion of the amount eventually paid was paid or incurred during the taxable year within the meaning of section 234 (a) (1) and section 200 of the Revenue Act of 1918.

• The Commissioner determined, in effect, that the amount of $33,380 additional compensation was neither paid nor incurred in the taxable year and our only problem is to decide whether or not the petitioner has overcome the presumption in favor of the Commissioner by the production of evidence tending to show that in 1918 a legally en-forcible obligation to the employees had been incurred. Appeal of Van de Kamps Holland Dutch Bakers, 2 B. T. A. 1247. In our opinion the petitioner has not overcome this presumption.

A great deal of the testimony of the three Bauer brothers was indefinite, conflicting, and ambiguous. This was especially true of their testimony in regard to the exact time when they decided to pay bonuses to certain men in fixed amounts and in regard to their reason for so deciding. It also appeared on cross-examination that although they had filed affidavits with the Bureau of Internal Revenue in connection with this case they had never sworn previously either that they had decided upon names and amounts or that any employee had been told of the amount he was to receive. In 1918 there was no writing relating to the payment of any bonus. Nevertheless we have found as a fact from the uncontradicted testimony of these three witnesses that at some time during the summer or fall of 1918 they decided among themselves upon the men to whom bonuses would be paid and upon the amounts to be paid to each man. But this finding-does not determine the issue.

The petitioner sought to prove further that some employees were fold in 1918 of the amount of additional compensation they were to receive. C. L. Bauer, the president, on direct examination, stated that no discussion was had with the employees as to the specific amounts of additional compensation to be paid to each, but that the brothers themselves thought the amount was definitely settled and that he had definite conclusions as to what his discretion, as it was termed in the resolution, should be. On cross-examination he qualified his direct testimony with the statement that he would not say that no employee had been told of the amount he would receive. W. A. Bauer, the treasurer, said that he had never mentioned to any employee an amount which such employee would receive. L. E. Bauer, however, testified that he had told three men, Gogenheim Gar-brey, and Collette, the amount of their respective bonuses. The three Bauers and Caskey were the only witnesses. The latter knew that he would receive a bonus but did not know the amount of it.

The three brothers made up only one-half of the board of directors. We have grave doubt as to whether they ever had or even thought they had authority, independently of the board of directors, to make such a substantial increase in salaries, particularly as the three of them were to receive about 83 per cent of it themselves. Apparently they thought that some action of the board was necessary. The board of directors met before any book entry was made in regard to the bonuses and authorized such increase as the discretion of the president might dictate. The form of the minutes of this meeting is indicative of original action rather than of ratification of something already done. It implies that no list of names and amounts had yet been made.

If then L. E. Bauer announced to each of three men the respective amount which he would receive, it does not appear that he did so by virtue of any proper authority from the corporation or from his brothers, and it does not appear that the corporation would be bound to pay the amounts he promised. Furthermore, the record contains an inference only that the bonuses as finally paid tallied with those decided upon by the brothers. The thread connecting the final discretion of the president with the earlier unwritten decision of the three brothers is weak indeed.

This case is distinguishable from Appeal of Reub Isaacs & Co., 1 B. T. A. 45, for in that case it clearly appeared that the resolution after the close of the taxable year was only a formal confirmation or ratification of what had been legally done in behalf of the corporation within the year. Likewise this case is not controlled by Canton Art Metal Co. v. Commissioner, 6 B. T. A. 446, for in that case it appeared that as to the year 1918, everything necessary to create a liability was done within the taxable year and the making of the book entries was delayed only on account of a mistake. As to the year 1919 the case is some authority for our present decision. Appeals of American Express Co., 2 B. T. A. 498, and Josiah Wedgewood & Sons, Ltd., 3 B. T. A. 355, are not in point.

The facts found in the Appeals of Randall Bros, Inc., 4 B. T. A. 291, and Illinois Paper Box Co, 4 B. T. A. 1227, are quite similar to the facts before us. The difference, if any, would be that the present facts are less favorable to the allowance of a deduction. Yet in each of those cases we denied a similar deduction. We therefore hold in this case that the facts proven do not overcome the presumption that the determination of the Commissioner was correct.

Judgment will le entered for the respondent.

Considered by MoRRis and Siefkin.


text:
    Harry Leopold, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8867.
    Promulgated November 28, 1927.

      Louis F. Gosswein, Esq., for the petitioner.

      J. Harry Byrne, Esq., for the respondent.
   OPINION.

Muedook :

Section 218 of the Revenue Act of 1918 provides in part as follows:

Sec. 218. (a) That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, * * *

The evidence in this case fails to show that the petitioner’s distributive share of the net income of the partnership for the taxable year differed from the amount determined by the Commissioner as representing such distributive share. The petitioner does not complain of the Commissioner’s division of the credits for contributions. Conceding that the Commissioner’s determination is in accordance with the partnership agreement, the petitioner contends that for this year the shares after the deduction of so-called interest were not distributed on a two-to-one basis. But the petitioner confines his proof to what was reported and fails to show that he was not entitled to one-third of the profits. We have no reason to believe that the partnership agreement was not controlling. The books were not offered in evidence and we do not know that they show a distribution in any other proportion than two to one.

Judgment will he entered for the respondent.

Considered by Moeeis and Siefkin.