author: Littleton:

text:
    Morris County Crushed Stone Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. Concrete Supply Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. North Jersey Amiesite Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8298, 8299, 8300.
    Promulgated April 13, 1927.
    Single consolidated income and profits-tax returns, Forms 1031 and 1103, filed for tlie calendar year 1917 by a corporation claiming to be affiliated with certain other corporations among which were the petitioners, which returns were signed and sworn to by the president and the secretary and treasurer of the alleged parent corporation, who were also similar officers of the alleged subsidiary corporations, and in which returns the consolidated income and invested capital of the several corporations were stated and to the excess-profits-tax return a consolidated balance sheet at the beginning and the end of the year was attached, were not the income and profits-tax returns required to be filed by the petitioners within the meaning of the statute and rulings of the Commissioner made pursuant thereto. The assessment and collection of the deficiencies determined by the Commissioner to be due from petitioners for the calendar year 1917 may therefore be assessed and collected at any time.

      H. A. Mihills, C. P. A., for the petitioners.

      Thomas M. Wühins, Esq., for the respondent.

      On August 21, 1925, the Commissioner mailed notices of his determination of deficiencies in income and profits tax for the calendar year 1917 of $53.95 as to the Morris County Crushed Stone Co., $84.79 as to the Concrete Supply Co., and $1,697.27 as to the North Jersey Amiesite Co. The amounts had not then nor have they since been assessed.
    Petitioners claim that single consolidated income and profits-tax returns prepared on Forms 1031 and 1103 on which appeared the name of the North Jersey Quarry Co., the parent corporation, and the names of several claimed subsidiary corporations, among which were included the petitioners, which forms were signed and sworn to by the president and the secretary and treasurer of the North Jersey Quarry Co., who were similar officers of all of the subsidiary corporations shown, and filed with the collector of internal revenue on March 30, 1918, constituted the filing of a return by each of the petitioners within the meaning of the law and operated to set in motion the statute of limitations prescribing the time within which the Commissioner could make an assessment against them. Petitioners insist, therefore, that, inasmuch as the Commissioner’s determination of deficiencies against them was not made until 7 years and 5 months after the consolidated return was filed, no additional tax may now be assessed.
    The Commissioner contends that these petitioners did not file income and profits-tax returns for the calendar year 1917 as required by the statute and his instructions pursuant thereto; that the consolidated income and profits-tax returns filed by the parent corporation, although the names of petitioners were stated therein as being affiliated, were the returns only of the alleged parent corporation, the North Jersey Quarry Co., and did not operate to start the running of the statute of limitations as to the assessment and collection of any tax determined by him to be due by the petitioners.
    FINDINGS OF FACT.
    Petitioners are New Jersey corporations engaged in the production and sale of crushed stone, sand, gravel, and paving material, with office and place of business at Morristown, N. J. Early in 1918 W. L. Schmidt, president, and I. W. Wortman, secretary and treasurer of eight New Jersey corporations engaged in the crused stone, sand, gravel, and paving-material business, in which number the petitioners were included, prepared separate corporation income-tax returns for the calendar year 1917 for these eight corporations. These two officers carried these returns to the office of the collector of internal- revenue at Newark, N. J., for the purpose of going over them with the collector, and for the purpose of discussing the matter of the excess-profits tax. Upon arrival they informed the collector of their desire to discuss the tax liability of these corporations with someone, whereupon a representative of the collector was assigned to discuss the matter with the corporate officers. Schmidt and Wort-man, and the collector’s representative sat down and discussed the matter of the income and invested capital, and the business and operations of the several companies. Thereupon the collector’s representative stated to Schmidt and Wortman that six of the corporations, in which number the petitioners ivere included, appeared to be affiliated and that a consolidated excess-profits-tax return should be filed; that two of the eight corporations not involved in these proceedings were not affiliated with any of the other corporations and their income and invested capital should not be included in the consolidated return. The two corporations which were believed by the collector’s representative not to be affiliated with any of the other corporations filed separate income and excess-profits-tax returns. Thereupon Schmidt and Wortman left the collector’s office without filing the separate income-tax returns of the six companies and returned to Morristown, N. J., and proceeded to prepare and execute a consolidated income-tax return, Form 1031, and a consolidated profits-tax return, Form 1103,- showing the consolidated net income and invested capital for the calendar year 1917. These consolidated income and profits-tax returns were entitled as follows:
    Name of Corporation: North Jersey Quarry Company and Affiliated Companies.
    B. North Jersey Amiesite Co.
    C. Morris County Crushed Stone Co.
    D. New Jersey Trap Rock Co.
    E. Patterson Crushed Stone Co.
    P. Concrete Supply Co.
    Principal Office: 17 South Street, Morristown, N. J.
    Kind of Business Carried on: Crushed stone, sand, gravel, and paving material.
    The consolidated income and profits-tax returns ivere signed and sworn to by W. L. Schmidt, president, and I. W. Wortman, secretary and treasurer, respectively, of all of the companies.
    The nature of the business of all of the companies, which was the same, and the dates of incorporation of each company and the laws of the State under which incorporated were stated in the consolidated returns. The following answers were made to questions on page 4 of the consolidated excess-profits-tax return, Form 1103:
    Is the corporation affiliated with one or more other corporations within the meaning of Article 77 of the Excess Profits Tax Kegulations? Yes.

    If so, submit a statement describing all of its intercorporate relationships. The North Jersey Quarry Company is a holding Company. ¡The North Jersey Anwesite Company, the Morris County Crushed Stone Company, the New Jersey

      Trap Roclc Company, the Patterson Crushed, Stone Company, and the Concrete Supply Gomipany are subsidiary and affiliated Companies, using the capital, property, and plants of the North Jersey Quarry Company in their operation. The Companies are all operated practically as one from, the same office, and by the same officers. These Companies do an interchange business, and are dependent upon each other for their successful operation.

    Is this return a consolidated return within the meaning of Article 78 of the Excess Profits Tax Regulations? Yes.

    Submit a copy, in detail, of (a) The balance sheet of the corporation at the beginning of the taxable year, (b) The balance sheet of the corporation at the close of the taxable year. Attached.

    The balance sheet attached was a consolidated balance sheet of the North Jersey Quarry Co. and associated companies at January 1, 1917, and December 31, 1917.
    On March 28, 1918, the consolidated income and profits-tax returns were forwarded by mail to the collector of internal revenue with the following letter of that date:
    In accordance with instructions received at your office during Mr. Schmidt’s and the writer’s call a few days ago, we are enclosing herewith a combined report covering the North Jersey Quarry Company, the North Jersey Amiesite Company, the Morris County Crushed Stone Company, the Patterson Crushed Stone Company, the New Jersey Trap Roclc Company, and the Concrete Supply Company, all in accordance with Articles 77 and 78 of the Income Tax Regulations. These Companies are all affiliated and operated from this office. The North Jersey Quarry Company is the holding Company. The North Jersey Quarry Company, together with Mr. Schmidt, who is President of all the Companies, and the writer, who is Secretary and Treasurer of all the Companies, represent practically the entire capital as well as the entire management of these Companies.
    Yours very truly,
    North Jersey Quarry Company,
    I. W. Worth an, Secretary.

    These consolidated income and profits-tax returns showing a consolidated net income of $20,919.81 and an income tax due of $770.06, and no excess-profits tax due, were received and filed by the collector of internal revenue at Newark, N. J., on March 80, 1918. The tax shown to be due was assessed and paid in due course. None of the alleged affiliated corporations, among which the petitioners were listed on the consolidated returns, filed a separate return of its income or invested capital.
    On January 15, 1923, the North Jersey Quarry Co., Patterson Crushed Stone Co., Morris County Crushed Stone Co., Concrete Supply Co., North Jersey Amiesite Co., and the New Jersey Trap Rock Co. received from the Commissioner separate letters, addressed to 17 South Street, Morristown, N. J., reading as follows:
    The Revenue Act of 1021 provides that assessment of additional income and profits taxes for the taxable year 1917 must be made within five years after the date when such return was filed.

      The Commissioner of Internal Revenue is reluctant to proceed to impose assessments based upon a superficial determination of the true tax liability and in his judgment, both for the interests of the Government and the taxpayer, assessments should be made only after a thorough audit and careful consideration of all the facts in the case.
    However in view of the limitation of time to permit the completion of this program it is requested that you execute and return to this office the enclosed form of waiver.
    With each of these letters there was enclosed a printed form of waiver of the statute of limitations as follows:
    In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921,-of-and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said-for the years-under the Revenue Act of 1921, 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, irrespective of any period of limitation.
    None of the corporations mentioned executed a waiver.
    Prior to March 7, 1923, the Commissioner’s field agent made an investigation and audit of the books and records of the corporations included in the consolidated returns for the calendar year 1917 and prepared a report of the tax liability of these companies upon a consolidated basis. On March 7, 1923, the internal revenue agent in charge transmitted a copy of this report to the office of the companies at Morristown, N. J.
    In March, 1923, the Commissioner made a jeopardy assessment of an additional tax of $5,794.83 against the North Jersey Quarry Co. for the calendar year 1917 and on March 15, 1923, mailed this corporation a registered letter as follows:
    An examination of your income tax return for the year 1917, together with the information heretofore submitted, has been made and the results thereof are outlined in the attached statement.
    You are advised that in order that the collection of this tax may not be jeopardized by the delay incident to the giving of the usual thirty days notice, as provided for in Section 250 (d) of the Revenue Act of 1921, an immediate assessment by the Commissioner of Internal Revenue will be made.
    The Bureau will, however, entertain a claim in abatement if an appeal is filed within thirty days of the receipt of this letter. The appeal attached to the claim should be filed with the Collector of your district and be under oath sotting forth in full all information upon which you base your protest and should be addressed to the Commissioner of Internal Revenue for the specific attention of IT :NR :G~MPS. On request a conference will be arranged prior to final decision.
    If appeal is not filed, payment should be made upon receipt of notice and demand from the Collector of Internal Revenue for your district.

      To this letter was attached a statement as follows:
    Schedule 1
    INCOME ADJUSTMENTS
    Net income as reported on original return_$20,919.81
    As corrected_ 24,971. 49
    Increase as explained below_ 4, 051. 68
    Depletion disallowed, $4,051.68. Owing to the fact that this deduction has not been fully substantiated it has been disallowed pending the receipt of further information.
    Schedule 2
    In the absence of complete data relative to your invested capital, the excess profits tax for the year has been computed as follows:
    Net taxable income for the year as computed-$24, 971. 49
    Less: Dividends received_ 12,128. 00
    Amount subject to excess profits tax_12, 843.49
    Less: Exemption provided by law-„ 3,000.00
    Amount taxable at 60%_ 9, 843.47
    Excess profits tax_ 5, 906. 08
    Schedule 3
    COMPUTATION OF INCOME AND TOTAL TAX
    Net income as corrected-$24,971. 49
    Less: Excess profits tax_ 5,906.08
    Taxable at 2%_ 19, 065.41
    Less: Dividends- 12,128. 00
    Taxable at 4%- 6,937. 41
    Excess profits tax_ 5,906.08
    Tax at 2%_ 381.31
    Tax at 4%_ 277.50
    Total tax_ 6, 564. 89
    Previously assessed- 770. 06
    Additional tax due- 5, 794. 83
    This additional tax which was assessed against the North Jersey Quarry Co. was subsequently abated.
    On August 21, 1925, the Commissioner mailed to each of the petitioners notices of his final determination of deficiencies as here-inbefore indicated, as follows:
    The determination of your income tax liability for the year 1917 on the basis of a revised affiliation ruling for that year, and an examination of your books and other data on hand in this office results in a deficiency in tax amounting to $1,697.27. [This was the amount determined in the case of the North Jersey Amiesite Co.]

      Details of the adjustments resulting in the above tax liability are shown in schedules accompanying a separate communication from this bureau to the North Jersey Quarry Company.
    These notices advised the petitioners of their right to file an appeal with this Board. In a statement attached to each of the notices, mailed to each of the petitioners, the Commisisoner stated “No return filed. The tax is assessable under Section 277 (a) of the Revenue Act of 1924.” The deficiencies determined by the Commissioner against these petitioners has not been assessed. Within 60 days after the mailing by the Commissioner of the notices of his determination each of the petitioners filed petitions witli the Board in which the only claim made is that the deficiencies were barred by the statute of limitations prior to the Commissioner’s determination.
   OPINION.

Littleton:

The petitioners claim that the consolidated income and excess-profits-tax returns, Forms 1031 and 1103, constituted the return of each of them and that the statute of limitations began to run on the date these consolidated returns were filed on • March 30, 1918, and that since the Commissioner has not assessed any additional tax against them and did not make his determinations of the alleged deficiencies until 7 years and 5 months after March 30, 1918, their liability for any additional tax is extinguished by section 1106 of the Revenue Act of 1926.

The Commissioner contends that the petitioners, which claimed to be affiliated as subsidiaries of the North Jersey Quarry Co., in the single consolidated income and excess-profits-tax returns filed on March 30, 1918, did not file either an income-tax return, Form 1031, or an. excess-profits-tax return, Form 1103, as required and that the consolidated income-tax return, Form 1031, and the consolidated excess-profits-tax return, Form 1103, did not operate to set in motion the statute of limitations as to the assessment of any tax against the alleged.subsidiary corporations, the petitioners in this proceeding.

Section 13 (b) of the Revenue Act of 1916 provides :

Every corporation, joint-stock company or association, or insurance company, subject to the tax herein imposed, shall, on or before the first day of March, nineteen hundred and seventeen, and the first day of March in each year thereafter, * *. * render a true and accurate return of Us annual net income in the manner and form to be prescribed by the 0ommissioner,of Internal Revenue, with the approval of the Secretary of the Treasury, and containing such facts, data, and information as are appropriate and in the opinion of the commissioner necessary to determine the correctness of the net income returned and to carry out the provisions of this title. The return shall he sworn to by the president, vice president, or other principal officer, and by the treasurer or assistant treasurer. The return shall be made to the collector of the district in which is located the principal office of the corporation, company, or association, where are kept its books of account and other data from which the return is prepared * * *. All such returns shall as received be transmitted forthwith by the collector to the Commissioner of Internal Revenue. (Italics ours.)

Section 206 of Title II — War Excess Profits Tax — of the Revenue Act of 19IT, approved October 3,191T, provides, so far as is material here, as follows:

That for the purposes of this title the net income of a, corporation shall be ascertained and returned * * * (c) for the taxable year upon the same basis dnd in the same manner as provided in Title I of the Act 'entitled “Ah Act to increase the revenue, and for other purposes,” approved September eighth, nineteen hundred and sixteen, as amended by this Act, except that the amounts received by it as dividends upon the stock or from the net, earnings of other corporations, joint-stock companies or associations, or insurance companies, subject to the tax imposed by Title I of such Act of September eighth! nineteen hundred and sixteen, shall be deducted. (Italics ours.) • ■

Sections 212 and 213 of the Revenue Act of 191T provide, as follows

Seo. 212. That all administrative, special, and . general provisions of 'law, including the laws in relation to the assessment, remission, collection; and refund of internal-revenue taxes not heretofore specifically repealed,’ and net inconsistent with the provisions of this title are hereby extended and made applicable to all the provisions of this title and to the tax herein imposed, and all provisions of Title I of such Act of September eighth, nineteen hundtéd and sixteen, as amended by this Act, relating to'returns and payment of the -tax therein imposed, including penalties, are hereby made applicable ■ to • the tax imposed by this title. * ■
Sec. 218. That the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall make al( necessary regulations for carrying out the provisions of this title, and may require,any corporation, partnership, or individual, subject to the provisions.of this title, to furnish him with such facts, data and information as in his judgment are necessary to .collect the tax. imposed by this title.

The Commissioner took the position, which is not questioned! in this proceeding, that for the purpose of the excess-profits tax imposed by Title II of the Revenue Act of 1917, the income and invested capital of two or more domestic corporations might, under certain circumstances, he consolidated, and ho’gave certain instructions and promulgated certain rulings prior to the time for filing of the returns for 1917 in relation to the income-tax return, Form’ 1031, and the éxcess-profits-tax return, Foi'm 1103. In Treasury Decision 2650, promulgated February 9, 1918, the Commissioner extended to April 1, .1918, the time for filing the income-tax return- and the excess-profits-tax return required to be filed between October 16, 1917, and March 1, 1918, because of unavoidable delay in the preparation of forms and regulations for the war-excess-profits tax. In his Regulations No. 33, promulgated January 2, 1918, Treasury Decision 2690, he provided in article 203 thereof as follows: ...

Every corporation not specifically enumerated as exempt shall make- a return of annual net income whether or not it may have for the particular year any net income, or whether or not it shall be a subsidiary of or controlled by another corporation, and such return, if made on the basis of a calendar year, must be filed with the collector on or before March 1, next following the year for which the return is made; if on the basis of a fiscal year ending with a date other than December 31, it must be filed within 60 days after the close of such fiscal year.

This regulation related only to the return Form 1081 for the purpose of the income tax imposed by the Revenue Act of 1916, as amended by the Revenue Act of 1917. In the income-tax return, Form 1031, prescribed by the Commissioner to be filed by every corporation, the Commissioner set forth on the first page thereof under the heading “ General Instructions,” among other instructions, the following:

Excess Peoeits Tax. — For the purpose of war excess profits tax, every corporation subject to income tax shall be deemed to be engaged in business, and all the trades and businesses in which it is engaged (whether continuously carried on or not) shall be treated as a single trade or business, and all its income from whatever source derived shall be deemed to be received from such trade or business.
* sjs * * * * *
In the case of a trade or business having more than a nominal invested capital, the excess profits tax is equal to various percentages of the net income, depending on its ratio to the invested capital. Every corporation having a net income of over $3,000 for the taxable year must malee a return of .invested capital and compute the amount of tax on Form 1103.
1)i Jjs H* * # * *
Stxbsidiaey Companies. — The corporation making this return must attach hereto a list of all its subsidiary companies, if any, with the location of the principal place of business of each. Each subsidiary company must make a separate and distinct return. (Italics ours.)

The corporation excess-profits-tax return, Form 1103, prescribed by the Commissioner to be filed for the calendar year 1917 and which was used by the North Jersey Quarry Co., in which it stated the combined income and invested capital as it determined it, contained on the first page thereof under the heading “ General Instructions,” among other instructions, the following:

Who Must Make A Return on Poem 1103. — Every corporation having for the taxable year a net income of $3,000 or more (see Form 1031) must make a return on this form of its average invested capital during the taxable year and compute the amount of its excess profits tax, if any, as directed herein.
This return should be made at the same time and in the same manner as the return of net income for the taxable year on Form 1031.

Prior to the filing of the excess-profits-tax returns for the calendar year 1917, the Commissioner provided in article 77 of his Regulations 41 the following :

For the purpose of this regulation two or more corporations will be deemed to be affiliated (1) when one such corporation owns directly or controls through closely affiliated interests or by a nominee or nominees, all or substantially all of tbe stock of the other or others, or when substantially all of the stock of two or more corporations is owned by the same individual or partnership, and both or all of such corporations are engaged in the same or a closely related business; or (2) when one such corporation (a) buys from or sells to another products or services at prices above or below the current market, thus effecting an artificial distribution of profits or (b) in any way so arranges its financial relationships with another corporation as to assign to it a disproportionate share of net income or invested capital.

In Treasury Decision 2662, approved March 6, 1918, relating to consolidated returns for the purpose of the excess-profits tax imposed by Title II of the Revenue Act of 1917, the Commissioner provided as follows:

A consolidated return shall be filed by the parent or principal corporation in the office of the collector of the district in which it has its principal office. Each .of the other affiliated corporations shall file in the office of the collector of its respective district a return, entering thereon its name and address and replying to the questions in Schedule 1, and to questions 1, 2, 3, 4, and 11 on page 4 of Form 1103; and stating also (1) that the corporation is affiliated with a designated parent or principal corporation, (2) that its return is included in the consolidated return of such parent or principal corporation, and (3) the district in which the consolidated return is filed.

None of the petitioners filed either an income-tax return, Form 1031, as required by the statute and the rulings of the Commissioner, or an excess-profits-tax return, Form 1103, as required by section 206 of Title II of the Revenue Act of 1917 and the instructions and decisions of the Commissioner made under authority of the statute.

The Revenue Act of 1917 did not in express terms provide for the determination of the excess profits tax upon the basis of consolidated returns, and in section 1331 (a) of the Revenue Act of 1921 it was provided:

That Title II of the Revenue Act of 1917 shall be construed to impose the taxes therein mentioned upon the basis of consolidated returns of net income and invested capital in the case of domestic corporations and domestic partnerships that were affiliated during the calendar year 1917.

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

The amount of income, excess-profits, or war-profits taxes due 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 * * * Provided further, That in the case of a false or fraudulent return with intent to evade tax, or of 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 * * *.

The provisions of the Revenue Acts of 1916 and 1917 required every corporation to file an income-tax return and. an excess-profits-tax return in the manner and form prescribed by the Commissioner. The Commissioner prescribed two forms, 1031 and 1103, and' gave specific instructions concerning the filing thereof, and also instructed corporations claiming to be affiliated what should be done in the matter of filing returns. He instructed that every corporation, whether affiliated or not, should file an income-tax return Form 1031. He instructed that when corporations claimed to be affiliated within the moaning of article 77 of Regulations 41, the parent or principal corporation should file a consolidated excess-profits-tax return, Form 1103, and that each of the other affiliated corporations should file in the office of the collector of its respective district an excess-profits-tax return, Form 1103, giving certain specified information.

The petitioners knew of the Commissioner’s instructions concerning the filing of returns and they had in their possession corporation excess-profits-tax return Form 1103 containing positive instructions of the Commissioner that “ every corporation * * * must make a return on this form ” and “ this return should be made at the same time and in the same manner as the return * * * Form 1031.”

- Whether the income-tax return, Form 1031, and the excess-profits-tax return, Form 1103, which were filed by the North Jersey Quarry Co., alleged parent corporation, were correct and proper returns is not material here. They were not the income and excess-profits-tax returns Required to be filed by these petitioners. These petitioners were not relieved of filing separate income and profits-tax returns merely because the alleged parent corporation had filed consolidated returns. The consolidated returns were the returns of the North Jersey Quarry Co., and the fact that the officers of the alleged parent corporation which filed the returns were also officers of the alleged subsidiary corporations would not make those returns the returns of these petitioners required to be filed by the statute and the regulations. In the case of Beam v. Hamilton, 289 Fed. 9, the Circuit Court of Appeals for the Sixth Circuit had before it the question of whether the lower court had properly held that Beam was liable for a 50 per cent penalty for failure to make an excess-profits-tax return for the year 1917. In considering that question the court discussed the matter of the income and excess-profits-tax returns required to be filed, and in that connection said:

The sole substantial question presented is whether' the penalty provision involved extends to a failure to make a return of excess profits, or whether it is limited to failure to make any income tax return. In our opinion the 50 per cent, penalty applied to the failure to make an excess profits tax return. The excess profits feature had its genesis in the United States in the Act' of March 3, 1917, which applied only to corporations and partnerships. The Act of October 3, 1917, with which we are concerned, applied to individuals as well, and superseded the Act of March 3, 1917, so covering the entire of the year 1917. Holmes, Federal Taxes (1923 Ed.) p. 1213. In the Act of October 3, 1917, a distinction between ordinary income taxes and excess profits taxes was clearly recognized; separate and distinct provisions being made for return of the two classes of taxes. The act was divided into 13 titles; title I relating to war income taxes, title II to war excess profits taxes, titles III to IX, inclusive, and title XI relating respectively to taxes on beverages, tobacco, and manufactures thereof, public utilities and insurance, excise, admissions and dues, stamp taxes, estate tax, and postal rates. Title X contained administrative provisions, title XII income tax amendments, and title XIII general provisions. Section 201, which is part of title II, imposed' the excess profits taxes in question. Section 212, also part of title II, expressly made applicable thereto all provisions of title I of the Act of September 8, 1916, as amended by the revenue act here in question, relating to returns and payment of the tax therein imposed, including penalties,’’ [sic] thus incorporating into title II of the Act of October 3, 1917, the requirement of section 8 of title I of the 1916 act, which requires a “ true and accurate return under oath ” to be made “ in such form as the Commissioner of Internal Revenue, with the’ approval of the Secretary of the Treasury, shall prescribe”; while section- 213 (also-part of title II)authorized -the Commissioner -of Internal Revenue, with the- approval of the Secretary of the Treasury, to make regulations for carrying out the provisions of that title, and to require corporations, partnerships, or individuals ^subject to the provisions thereof “to furnish him with such facts,-data and information as in his judgment are necessary to collect the taxes imposed - by tMs title,” viz. the excess profits taxes. In 1917 the Commissioner provided two separate forms for individual tax returns, No. 1040, entitled “ Individual Income Tax Return for Calendar Year 1917,” and No. 1101, entitled “ Individual Excess Profits Tax Return for Calendar Year 1917.” Heading A on Form 1040 contained blanks for details regarding “ income from salaries, wages,” etc. The first paragraph of instruction No. 7 (form 1040), entitled “Excess Profits Taxes,” directed that:
“ If your net income reported under A * . * * exceeded $6,000, you are subject to an excess profits tax at the rate of 8 per cent, on the amount by" which the net total under A exceeds $6,000.” - -
Heading B on Form 1040 relates "to “income from business (including'farming).” The-soeond paragraph of instruction No. 7 on that form reads:
“If your total income from all sources exceeded $6,000, and you received any income from a trade or business with invested capital, you should get a copy of the excess profits tax return (Form 1101) and calculate the amount of your tax, if any, as directed therein.”
On Form 1101 instruction 2 reads:
“ Every individual employing invested capital in his trade or business, anil having a net income for 1917 of $6,000 or more, must malee a return on this form.” ( '. , . - - -
And instruction No. 4 on Form 1101 gives the information that net income subject to excess profits taxes falls into two classes; that the first Comprises all nbt inc’ome derived from trade or businéss (including occupations--and professions) having no invested .capital or not more than,.a nopfinal capital, apd, includes incomes reported in Schedule A, Form 1040; that the tax pn such income should be computed and entered on Form 1040 according to the instructions thereon; but that all other income subject to tax (with reference to instruction No. 3 above, which in terms relates to excess profits taxes) should be entered on Form 1101, and the tax computed as directed in the instructions on that form. This Form 1101 contained four schedules, designated respectively as “ Net Income Subject to Tax,” “Adjusted Capital,” “ Deduction,” and “ Computation of Tax ”; each heading containing express reference to excess profits tax regulations. This Form 1101 was required to be sworn to as “ a true and complete return * * * pursuant to the Excess Profits Tax Regulations.”
We think the two returns, thus so clearly distinguished, in connection with the requirement of separate return on Form 1101, do not lose their separability or distinct identities from the fact that the amount of the excess profits tax is to be carried onto Form 1040, under headings 34 and 35, designated respectively as “excess profits tax at rate of 8 per cent, (see instruction No. 7, page 1)” and “ excess profits tax on income from business with invested capital, as computed on excess profits tax return, Form 1101,” nor from the fact that the excess profits tax is to be deducted, in line L of Form 1040, from the taxable income otherwise shown thereby.
* * * * # *
* * * Not only was the excess • profits tax a separate, distinct, and then novel source of revenue, but the statute and regulations, as we have above shown, in express and formal terms required separate and distinct returns thereof, and we think it clear that failure to make a separate return of excess profits tax is none the less a failure to make the return contemplated by the statute because of the mere fact that the computations on the excess profits return are to be carried onto Form 1040; the use of that form also is necessary to a complete report. By section 213 the Commissioner was undoubtedly given authority, with the approval of the Secretary of the Treasury, to require both returns.

When we consider that section 240 of the Revenue Act of 1918 provides “ That corporations which are affiliated within the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title [Title II — Income Tax] and Title III [War-Profits and Excess-Profits Tax], and the taxes thereunder shall be computed and determined upon the basis of such return ” and that in the Revenue Act of 1921, enacted almost three years later, Congress provided in section 1331 thereof that Title II — War Excess Profits Tax — of the Revenue Act of 1917 should be construed to impose such war-excess-profits tax therein mentioned “ upon the basis of consolidated returns,” it is evident that it was recognized at all times that each corporation claiming to be affiliated with another corporation should file separate income and excess-profits-tax returns for the year 1917. Neither the law nor the regulations permitted the filing of a consolidated income-tax return, Form 1031, for the year 1917. These petitioners did not comply either with the statute or the Commissioner’s instructions relating to the filing of returns for the year 1917.

These proceedings are to be distinguished from the Appeal of F. A. Hall Co., 3 B. T. A. 1172, and the Appeal of National Tank & Export Co., 3 B. T. A. 1217. Those cases concerned the year 1918. The Revenue Act of 1918 in section 240 specifically provided “ That corporations which are affiliated within the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title [Title II — • Income Tax] and Title III [War-Profits and Excess-Profits Tax], and the taxes thereunder shall be computed and determined upon the basis of such return.” This section required only one return to be filed for the year 1918 for the several affiliated corporations for the purpose of both the income tax and the excess-profits tax, but this was not true as to the year 1917. There is a further difference. The Board found in the Appeals of F. A. Hall Co., and the National Tank & Export Co., supra, that notwithstanding the corporations were not in fact affiliated under the Revenue Act of 1918, the consolidated return which had been filed set forth specifically the income and invested capital of each of the alleged affiliated corporations and the Commissioner was put upon notice of the income and invested capital of each corporation so that he could make a proper accounting. The income and invested capital of these petitioners were not so stated.

In view of the statutory provisions and the Commissioner’s instructions as to the filing of returns for the year 1917 and the facts and circumstances existing in these proceedings, it is the opinion of the Board that these petitioners filed no income-tax return ort excess-profitsTax return for the calendar year 1917 and the Commissioner may therefore assess and collect the tax at any time. The Commissioner’s determinations were not otherwise questioned and the deficiencies are therefore approved.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Aeundell :

license: Public Domain

text:
    T. G. Wilsford, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3853.
    Promulgated April 13, 1927.
    1. The evidence does not establish the right of the petitioner to deduct the entire amount of the operating loss of a plantation which was operated during a part of the year by a partnership of which the petitioner was a member.
    2. The evidence fails to establish right to deduction for claimed lessening in value of mules acquired for use on the plantation.

      O. R. Ewing, G. P. A., for the petitioner.

      Dwight H. Green, Esq., for the respondent.

      This proceeding involves an appeal from the action of the Commissioner in rejecting in part a claim for abatement filed by the petitioner. The latter alleges that the Commissioner erred in not permitting him to inventory certain work mules and in refusing to allow as a deduction the amount claimed as a loss in connection with the operation of a partnership.
    FINDINGS OF FACT.
    On or about January 1, 1920, the petitioner and W. L. Rhodes formed a partnership for the purpose of purchasing and operating a cotton plantation in the State of Arkansas. The profits and losses of the partnership were to be shared on the basis of two-tliirds to the petitioner and one-third to Rhodes. A plantation was purchased at Patoka, Ark., together with all the machinery and equipment necessary to operate it. On November 20, 1920, Rhodes executed a release transferring his interest in the partnership to petitioner in consideration of the petitioner assuming all the debts and liabilities of the partnership. The release reads as follows:
    Known all Men by these Presents that I this Day Release to T. G. Wilsford of Dula, Miss all claims that I may have on the following described Dand Dying and being in Crittendon County Arle.
    All of Section Two (2) and the Northeast quarter NE % North of the Bayou of Section Eleven (11) and the Northwest Quarter (NW 14) North of the Bayou except Southwest Quarter of Northeast Quarter of the Northwest Quarter of Section Twelve (12) all in Township Eive (5) Range Seven (7) containing Eight Hundred Seventy Eive (875) Acres of4 Dand more or less.
    also all interest that I may have in all Dive Stock — and all Farming Implements of all Kind and all Accounts that may be due the Firm of Wilsford and Rhodes.
    for the Consideration of the above the said T. G. Wilsford has agreed and assumed all Debts that may be against the Firm of Wilsford and Rhodes and on the above described Dand. Witness My Signature this the 20th Day of November 1920.
    (Signed) W. D. Rhodes.
    Witness
    W. R. Smith
    Rhodes owned no property other than that enumerated in the release quoted above.
    Thereafter the petitioner continued to operate the plantation for the balance of the year 1920 and during that period took active steps to liquidate and dispose of the property acquired by him in connection with this venture.
    The books of the partnership were not closed until December 31, 1920. Thereafter a partnership return was filed by Wilsford and Rhodes for the calendar year 1920, which return was executed by Rhodes and the loss for the year was shown therein as two-thirds to Wilsiord and one-third to Rhodes. In the original income-tax return filed by the petitioner lor the year 1920 he took as a deduction an amount equal to two-thirds of the claimed operating loss of the partnership. In an amended return filed on July 7, 1922, he deducted as a loss the entire alleged operating loss of the partnership.
    The petitioner -maintained that the execution of the release served to work a dissolution of the partnership and that in view of its dissolution and the assumption of the partnership debts he was entitled to take the entire operating loss of the partnership for the year 1920 as a deduction from his taxable gross income for the year 1920. The Commissioner permitted as a deduction an amount equal to only two-thirds of the operating loss of the partnership for the taxable year.
    During the year 1920 the partnership of Wilsford & Rhodes acquired a number of mules for use in working their cotton plantation. Some of the mules were sold to tenants on the plantation and a few of these were repurchased during the taxable year. Petitioner inventoried the mules at the close of 1920 .at a price substantially the same as that received by a neighbor for certain mules sold by the latter on or about December 31, 1920. The Commissioner denied the right of the taxpayer to inventory the mules and instead capitalized them at full cost and allowed 'depreciation at the rate of 12% per cent.
   OPINION.

Aeundell :

We think it is clear that the petitioner is not entitled to take as a deduction the entire operating loss of the partnership for the year 1920 in determining Ms net taxable income for that period, even though the partnership may have been dissolved on or about November 20, 1920. It is apparent from the release signed by Rhodes that petitioner in consideration of assuming Rhodes’ share of the . partnership debts received therefor such interest as Rhodes had in the plantation, together with the live stock, farming implements and accounts receivable. There is some testimony in the record which would indicate that the equity of petitioner' and Rhodes in the land was of little or no value, but the record is silent as to the value of the farming equipment, and the accounts receivable. The record establishes that the live stock had at least some value. Inasmuch ás the evidence discloses that the petitioner received property of some value for assuming Rhodes’ share of the partnership indebtedness, though what that value was he did not establish, he can not deduct in his personal return for the year 1920 the entire operating loss of the partnership for that year.

Even if it be proper to use the inventory method in a case of this sort, the evidence in the record is not sufficient for us to determine whether the basis used by petitioner was a correct one. The only testimony offered is that the price fixed in the inventory, which was not placed in evidence, was the same as the price at which mules were sold by a neighbor farmer on or about December 31, 1920. Neither the details of that sale nor the price received were testified to.

Judgment will be entered for the respondent after 15 days notice, under Rule 50.


author: Green :

text:
    First National Bank of Rock Rapids, Iowa, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 687.
    Promulgated April 13, 1927.

      M. J. Holland, G. P. A., for the petitioner.

      L. G. Mitchell, Esg., for the respondent.
    This is an appeal from the determination of deficiencies in income and profits taxes for 1917 and 1919 of $1,431.97 and $101.94, respectively. The issues raised by the pleadings are too general to be informative and the only issue specifically dealt with at the hearing is whether or not certain payments made to employees at Christmas time are deductible from gross income.
    FINDINGS OF FACT.
    The petitioner is a corporation doing a banking business at Rock Rapids, Iowa.
    During the year 1917 it paid to its 'employees in addition to the regular salary pajunents, amounts totaling $1,369.25. The entries on the petitioner’s books appear in the “Expense Account” under date of December 31, 1917, as “ Donations to employees ” $714, and “1916 Donation to Employees” $655.25. In another place in the journal the $655.25 item was entered under date of January 16, 1917, as “ Christmas gift to employees.” The petitioner was on a cash receipts and disbursements basis.
   OPINION.

Green :

We have considered the evidence and are of the opinion that the amounts of $655.25 and $714 were payments of compensation for services rendered and are deductible in the year when paid.

Judgment will be entered for the petitioner on the issues raised after 15 days’ notice, under Rule 50.


author: TRAmmell:

text:
    Omaha Elevator Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8247.
    Promulgated April 13, 1927.
    The petitioner corporation took out insurance policies on the lives of certain of its officers and employees, naming itself as beneficiary in each policy, but by a separate contract with each officer and employee, agreed to pay over the proceeds thereof to beneficiaries named by the insured if death occurred during employment, or, if the insured lived and continued in the service of the company, to turn the policy over to him. Held, the premiums were not deductible by the petitioner.

      J. B. Templeton, Esq., for the petitioner.

      F. 0. Graves, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1920. The deficiency asserted is $2,645.81, only that portion of which is involved which results from the disallowance by the respondent of $1,944.62 as a deduction on account of insurance premiums paid on the lives of officers and employees of the petitioner.
    Ño testimony was introduced. Our findings of fact are based upon allegations contained in the petition which are admitted in the answer, and upon stipulation entered into between the respective parties.
    FINDINGS OF FACT.
    The petitioner is a Nebraska corporation with its principal office in Omaha. During the calendar year 1918 the petitioner paid out $1,944.62 for premiums on endowment insurance policies covering the lives of its officers and employees. This amount was charged to the expense account of the petitioner and was deducted in its income and profits-tax return for 1918. The respondent, in arriving at his final determination of income and profits tax of the petitioner, disallowed the said item of $1,944.62 as a deduction for that year. The endowment insurance policies in question provide that the said petitioner corporation is the beneficiary. However, a special agreement was entered into between the petitioner and its officers and employees which was set forth in a communication to each of the officers and employees whose lives were insured. The following is a copy of the agreement and communication to one of its employees, which is the samp, as other agreements covering the insurance policies for which premiums in the amount of $1,944.62 were paid by the petitioner for the calendar year 1918, to wit:

      Omaha Elevator Company $2500.
    A System to Mutualize and Best Conserve the Interests of Employer and Employee.
    Mr. Chester P. Pederson,

      Grand Island, Nebraska.

    Dear Sir: We have received from the New York Life Insurance Company Policy No. 4 884 129 issued upon the 20 Year Endowment j)lan for Twenty-Eive Hundred Dollars upon your life, with Omaha Elevator Co. as beneficiary in accordance with your application.
    Pursuant to our desire to make a provision for your family in case you die while in the continuous service of this Company, and to provide a fund for yourself in case you live and remain continuously in the service of this Company for a period of Twenty years, we hereby notify you of our intention to carry out the following programme:
    (1) It is the purpose of Omaha Elevator Co. to pay the first and succeeding premiums on this insurance.
    (2) In case of your death while in the employ of this Company, we will if this Policy shall then be in force, immediately upon receipt of the proceeds thereof from the New York Life Insurance Company, send a check for the said proceeds to such beneficiary as you have named in writing over your signature filed with us.
    (3) In case you live and continue in our employ for Twenty years, and if the Policy is continued in force by us for said period we will present it to you, that you may select such option of settlement as is provided in the policy, and as best suits your convenience.
    (4) If you shall cease to continue in our employ, or your employment should be discontinued by us, prior to the end of the period of Twenty years, your interest in this insurance will immediately cease.
    It is the desire of Omaha Elevator Co. to aid in making provision for your family in the event of your death in our service or to secure for you a substantial fund in case you live and are continued in our employ for a period of Twenty years. We believe by so doing we will strengthen the bonds of loyalty between yourself and this Company, and that this provision will be an incentive to the faithful performance of your duties with us, and, on the other hand, enable you to feel more secure both as to your family and your own future. The discontinuance of payments of premiums by us will, of course, terminate the entire transaction, but as stated hereinbefore, it is our intention to pay these premiums if you remain in our employ and if your services continue in every way satisfactory for a period of 20 years, or until the policy matures by your death.
    Yours very truly, Omaha Elevator Co.,
    By (Signed) E. P. Peck,

      Vice President.

    I fully understand and appreciate all the terms and conditions relating to the insurance aforesaid, as herein set forth and accept the conditions prescribed, and hereby reguest that a sum equal to the amount of the Policy aforesaid be payable by, Omaha Elevator Co. to J. Bertie Pederson, my wife, after receipt by Omaha Elevator Co. of said amount from the New York Life Insurance Company in case of my death during the continuance of the Policy, should my death occur while in the service of the said Company.
    (Signed) Chester P. Pederson,
    Witness: Insured.

    (Signed)
    A. J. Gundel.
   OPINION.

TRAmmell:

The question is whether the petitioner was directly or indirectly the beneficiary of the insurance policies taken out by it on the lives, of its officers and employees. Section 215 of the Revenue Act of 1918, in so far as it is' pertinent to the issue here involved, is as follows:

Sec. 215. That in computing net income no deduction shall in any case be allowed in respect of—
* * * * * *
(d) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.

The petitioner was in each instance named as the beneficiary in the policies. It is contended, however, that the communication addressed by the petitioner to its officers and employees whose lives were insured and the acceptance by them of the terms and conditions set forth therein constitute a valid and binding contract on the part of the petitioner to pay over the proceeds of the policies to the beneficiaries named by the insured. The corporation could, however, discharge any employee or any' employee might resign and the company could continue the policy on the life of such officer or employee in force and effect until the policies had become fully matured as endowments. There is no evidence that the petitioner could not, whenever it saw fit, cancel the policy and receive the benefit of the cash surrender value or at any time have the benefit of the loan value.

The petitioner, being named as the beneficiary in the policies and not having deprived itself by virtue of the contract of its rights as such beneficiary, except under conditions which were entirely contingent and dependent upon subsequent .events, in our opinion it is not shown that the situation does not come within the meaning of the above quoted section of the statute. The petitioner had control of the.policy and could have benefited thereunder directly or indirectly.

In view of the foregoing, it is our opinion that the premium payments are not allowable as deductions in determining the petitioner’s net income.

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


author: Gkeen:

text:
    Yahola Sand & Gravel Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2281.
    Promulgated April 13, 1927.
    Depletion. — March 1, 1913, value oí gravel deposits determined for purpose of.

      M. F. Trimble, Esq., Charles P. Gotwals, Esq., and Ezra Brainerd, Jr., Esq., for the petitioner.

      Bruee A. Low, Esq., and B. H. Saunders, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1920 in the amount of $2,288.20. The deficiency results from the disallowance of a deduction claimed for depletion of certain sand and gravel deposits.
    FINDINGS OF FACT.
    The petitioner is an Oklahoma corporation with its principal office at 702-4 Surety Building, Muskogee, Olda. It was organized in 1912 under the name of Yahola Sand Co., but the name was subsequently changed to Yahola Sand & Gravel Co.
    On July 26, 1912, the petitioner corporation entered into a lease with one J. M. Pierce, the material provisions of which were that the petitioner had the right to remove from the premises owned by the lessor, within a period of 20 years, all of the sand and gravel in the property described therein. It was provided in the lease that the lessees should pay the lessors for the sand and gravel so removed at the rate of 60 cents per car of 100,000 pounds capacity and 55 cents per car for all cars of lessser capacity.
    The petitioner had previously on March 30, 1912, made a contract with the Peoples Electric Railway Co. whereby that company agreed to construct a branch road from its main line to the gravel bar, a distance of one and three-fourths miles. The railway company also agreed to transport cars loaded with gravel from the petitioner’s holdings to junctions with the St. Louis & San Francisco Ry. or the Missouri, Kansas & Texas Ry. in Muskogee, seven miles distant, or Fort Gibson, approximately three miles away, for $8 per car, empty cars to be transported free of charge. The petitioner guaranteed to the railway company a minimum payment of $3,000 per annum for a period of five years and executed a penal bond in the amount of $15,000 to guarantee such payment, the bond to be canceled at the expiration of five years provided the payments guaranteed thereby were made. The petitioner also advanced $3,000 to the railway company to apply on the construction of a branch line.

      The sand and gravel obtained under the Pierce lease was of good quality, standing all of the required tests .for building and paving purposes. At the time the lease was acquired there was a demand for such materials for paving and building purposes and for use in the oil fields in constructing refineries and foundations for pumping plants.
    On or about March 1,1913, gravel was selling for 10 cents per cubic yard at the pit. At times and under some circumstances the price ranged as high as 15 cents per cubic yard.
    A part of the leased properties lies within or below the meander line of the Arkansas Eiver. The portion above the meander line contained 3,538,200 cubic yards of gravel on March 1, 1913. The petitioner’s schedule of production has at all times contemplated the removal of gravel at such a rate that the life of the operation would be the life of the lease.
    The Commissioner has computed the deduction on a cost basis of $3,000.
   OPINION.

Gkeen:

The only question presented for determination by this appeal is: What amount, if any, should be allowed to the petitioner as depletion on the J. M. Pierce sand and gravel lease? The Commissioner has computed the deduction on a cost basis of $3,000, while the petitioner contends that the proper basis is the March 1, 1913, value of the lease. It was originally claimed that this value was $100,000 but at the hearing an amended petition Avas filed alleging that the March 1, 1913, value was $150,000.

The sand and gravel bar covered by the Pierce lease extends into the bed of the Arkansas River, but in this appeal the petitioner makes no claim for a valuation of any part of the bar below high water mark. Furthermore the United States District Court in United States v. Mackey, 214 Fed. 137, in an opinion rendered since the lease was negotiated, held that the bed of the Arkansas Eiver so far as the river is navigable, belongs to the State.

At the hearing the petitioner called numerous witnesses to the stand to testify as to the value of the lease here under consideration. The testimony of these witnesses as to the value ranges from $100,000 to $300,000. There were few sales or leases made in this vicinity at a time sufficiently close to March 1, 1913, to make evidence of them of any practical value in the determination of the value of this leasehold. From an examination of all of the evidence, we are of the opinion that the leasehold here involved had a value on March 1, 1913, of $100,000 exclusive of the amount heretofore allowed by the Commissioner, and that the depletion allowance should be based upon this amount.

Judgment will be entered after 15 days' notice, wider Bule 50.


author: Milliken:

text:
    W. C. Robinson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8800.
    Promulgated April 13, 1927.

      Walter W. MoVay, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
   Milliken:

This proceeding results from the determination of a deficiency in income tax for the year 1921, in the amount of $1,659.19. Error is alleged in that the Commissioner refused to allow petitioner a loss in the amount of $12,500 for the year 1921.

Petitioner is an individual, residing at Pittsburgh, Pa. In the year 1908, he and another individual purchased certain Sherardizing patents for the sum of $25,000, petitioner paying one-half thereof, or $12,500. In 1908, a corporation, the United States Sherardizing Co., was formed, to which the patents were assigned and the owners of the patents received the stock of the corporation. In the year 1908, petitioner gave some of his stock in the United States Sherardizing Co. to his brother and was unable to testify to the value or number of shares which he gave to his brother. He was also unable to testify to the number of shares which he owned on March 1, 1913, or in the year 1921, but has claimed in his tax return and in his petition filed with this Board that he suffered a loss to the extent of $12,500 in the year 1921.

Judgment wild be entered for the respondent.


author: MaRqtjette:

text:
    C. R. Rich and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2823.
    Promulgated April 13, 1927.
    The evidence herein establishes that the petitioner wilfully filed false and fraudulent returns for the years 1917 and 1918, with, intent to evade the tax.

      G. B. Bich pro se.

      JoJm D. Foley, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income taxes for the years 1917, 1918, and 1919, in amounts of $912.52, $1,961.20, and $193.26, respectively. The respondent has also asserted a fraud penalty for each year.
    FINDINGS OF FACT.
    The petitioner, O. R. Rich, is an individual residing at Lovelady, Tes. During the years 1917 to 1919, inclusive, he was a- married man and was engaged in the merchandise business at Lovelady, and also bought and sold cotton. He filed joint income-tax returns for himself and wife for each of the years named. The respondent, upon audit of the returns, taxed C. R. Rich and his wife on the community property basis.
    Subsequent to the filing by the petitioner, C. R. Rich, of his income-tax returns for the years 1917, 1918, and 1919, the respondent caused the petitioner’s books of account to be examined several times by a revenue agent, and his returns to be audited. The examinations and audit disclosed that the petitioner’s income for each of the years 1917, 1918, and .1919, was understated in his returns and that additional tax was due in the amounts hereinabove set forth.
    The petitioner’s closing cotton inventory, for the year 1917 was understated by about $Í4,000, and it was corrected accordingly by the revenue agent. During the course of the examinations by the revenue agent, the petitioner caused one item showing the sale of 200 bales of cotton in 1917, to be changed to 300 bales. The effect of this change was to reduce the petitioner’s closing cotton inventory for the year 1917, thereby increasing the cost of cotton sold and reducing tax liability. The petitioner in his income-tax return for the year 1918 reported no income from the sale of cotton. His profit from the sale of cotton in that year was in fact $18,124.75. The fact that this profit did not appear on the petitioner’s books and was not reflected in his income-tax return, was largely due to the fact that the petitioner omitted from his books sales of cotton in the amount of $37,170.30. When the omission of these sales and the change of 200 bales to 300 bales on his books were called to the petitioner’s attention by the revenue agent, the petitioner asked the revenue agent to let him off as easy as possible.
    The petitioner at the hearing of this appeal admitted that the additional taxes involved herein are due, but denied that his returns for the years 1917, 1918, and 1919, were fraudulently made with intent to evade the tax.
   OPINION;

MaRqtjette:

We are of the opinion, upon consideration of the evidence herein, that the respondent’s assertion of the fraud penalty for each of the years 1917 and 1918 should be sustained. The record is clear to the effect that the petitioner’s income for those years was understated in his return, and he admitted at the hearing that additional taxes are due for each of the years 1917, 1918, and 1919, in the amounts determined by the respondent. The petitioner’s closing cotton inventory for 1917 was understated by the amount of $14,000 and it appears that when the understatement was discovered by the revenue agent the petitioner changed an item on his books — which change would have the effect of reducing the inventory and making it appear not to have been understated. The petitioner also omitted to enter on his boobs and to include in his income-tax return for 1918, sales of cotton amounting to more than $37,000, and when this omission of sales and the changed item on his books were called to his attention by the revenue agent, the petitioner asked that he be let off as easy as possible. The petitioner denied at the hearing that his returns were intentionally understated, but produced no competent evidence to show that the irregularities established by the respondent were other than the result of his own wilful efforts to reduce his tax liability. Upon the record we believe that the petitioner wilfully filed false and fraudulent income-tax returns for the years 1917 and 1918, with intent to evade the tax, and we affirm the action of the respondent as to those years. We find no evidence of any fraud in the petitioner’s return for the year 1919, and we hold that the fraud penalty should not be asserted for that year.

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


author: Van Fossan:

text:
    R. Hamerslough Mercantile Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5426.
    Promulgated April 14, 1927.
    Amounts distributed to stockholders and carried on the books as accounts payable may not be included in invested capital.

      H. J. Wightman for the petitioner.

      W. H. La/wder, Esq., for the respondent.
    This appeal is taken from the determination of deficiencies of $435.96 and $51.97 in income taxes for the calendar years 1919 and 1920, respectively. It is alleged that the Commissioner erred in excluding from invested capital certain sums claimed to be earned surplus.
    FINDINGS OF FACT.
    Petitioner is a Colorado corporation with principal offices at Trinidad, Colo., and is engaged in the dry goods and clothing business. Petitioner made income-tax returns for the years 1919 and 1920 upon the basis of cash receipts and disbursements.
    The books of petitioner showed accrued earnings as of January 1, 1919, in the sum of $71,619.49, which were carried as accounts payable and credited to the accounts of the individual stockholders, four in number, in proportion to their respective interests. During the year 1919 there were withdrawals by the stockholders from accrued earnings aggregating $25,502.92. As of January 1, 1920, there were accrued earnings of $46,116.57 carried on the books as accounts payable and credited to the accounts of the individual stockholders, in proportion to their respective interests. On March 29, 1920, the directors of petitioner adopted a resolution acknowledging the indebtedness, as of January 1, 1919, of accrued earnings up to January 1, 1919, to the stockholders. In April, 1920, the stockholders accepted additional stock in payment of the indebtedness, so that the books of the corporation might be cleared of this liability.
    Prior to January 1, 1919, no dividend or formal distribution of' profits had been made by petitioner, and all earnings accrued at that time were set aside or credited to the stockholders according to their interests. Each stockholder had a personal account to which was credited his salary as well as his share of accrued earnings. It was the practice of each stockholder to withdraw funds at any time in any amount up to the amount of his credit, and such withdrawals were charged to his personal account. The stockholders were brothers and sisters and “ they divided the surplus as a partnership proposition instead of a corporation.”
    The invested capital reported by petitioner in its income-tax returns was $54,088.17 for 1919 and $94,697.73 for 1920. As adjusted by the Commissioner, it was $53,881.46 for 1919 and $93,873.23 for 1920. The addition to invested capital for 1920 allowed by the Commissioner represented the issuance to the stockholders of the additional stock in payment of the acknowledged indebtedness appearing on the books. The items of $71,619.49 and $46,116.57 did not appear in the returns for the respective years as part of invested capital, but appeared in supporting papers as accounts payable. Upon audit of the returns, claims were made for their allowance as invested capital.
   OPINION.

Van Fossan:

Petitioner alleges that respondent erred in excluding from its invested capital for 1919 earned surplus of $71,619.49 and for 1920 earned surplus of $46,116.57. The evidence is conclusive that the alleged earned surplus for both years was distributed as of January 1 among the stockholders in proportion to their respective interests and was at all times subject to withdrawal by the individual stockholders. The earnings were shown on the books as accounts payable and constituted, and were recognized as, definite liabilities of the corporation. Clearly, such earnings are not invested capital and were properly excluded therefrom. The-determination of respondent is approved. See Electrical Supply Co., 1 B. T. A. 658; A. H. Stange, 1 B. T. A. 810; Kelly-Buckley Co., 1 B. T. A. 1154; H. H. Hornfech & Son, Inc., 3 B. T. A. 1165; W. E. Caldwell Co., 6 B. T. A. 47.

Judgment will be entered for the respondent.


text:
    Crowell Lumber & Grain Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 366.
    Promulgated April 14, 1927.
    1. Deduction for repairs allowed.
    2. Deduction for obsolescence disallowed.

      Ben Jenhins, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of its income and profits taxes for the year 1919, for whiéh the Commissioner has determined a deficiency in an amount less than $10,000, the exact amount of which appears neither from the pleadings nor the evidence. There is in controversy only so much of the deficiency as results from the disallowance by the Commissioner of two deductions claimed by the petitioner, the first a deduction -of $250 for repairs and the second a deduction in the- sum of $1,009.44 for obsolescence of a portion of a grain elevator.'
    FINDINGS OF-FACT.
    The petitioner herein, a Nebraska corporation with its principal place of business at Omaha, owns and operates in the vicinity of that city a number of grain elevators. In 1915 it purchased ten small elevators for a total consideration of $30,000. One of the ten elevators was located at Coleridge, Nebr., and of the total consideration paid, $3,000 may be treated as its cost. This elevator consisted of an elevator head house, an office, coal sheds, etc. In 1915 there was expended thereon by way of additions and betterments the sum of $63.95; and in 1916 the sum of $1,968.45.
    In .1919 the petitioner decided to recondition its Coleridge property and employed an expert in elevator construction to do the work. Repairs were made on the coal sheds at a cost of $250. After investigation it was determined that the elevator head house could not be repaired and that it would have to be torn down and rebuilt. The cost of demolishing the elevator head house was approximately the value of the materials salvaged.
    Two-thirds of the cost of the properties acquired at Coleridge is attributable to the elevator head house.
   opinion.

Green :

The petitionee has established its right to a deduction for repairs in the sum of-$250.

The evidence in support of the obsolescence deduction proved only that in 1919 the petitioner ascertained the run-down condition of the elevator head house and demolished and rebuilt it. Undoubtedly the petitioner is entitled to deduct as a loss the actual loss thus sustained. We have found that $2,000 is to be treated as the cost of the head house but there is no evidence whatever as to the amount of depreciation sustained thereon from the date of its acquisition to the date of its demolition. Without proof of the depreciated cost the loss can not be computed.

Judgment will he entered after 15 days' notice, under Bule 50.


author: ÁRUNdell:

text:
    Fred H. Tibbetts, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2479.
    Promulgated April 14, 1927.
    1. Petitioner, a civil engineer, performed services for political ' subdivisions of tire State of California under contracts fixing bis compensation at a percentage of the cost of construction and maintenance of the projects in connection with which 'his services were engaged. Held, the petitioner was not an officer or employee of the State or its political subdivisions within the meaning of section 1211 of the Revenue Act of 1926.
    2. It not being shown that an income tax on the compensation received under the contracts would impair petitioner’s ability to discharge his obligations to the Stale or that the tax would interfere with the ability of the State to secure his services, held, that the amounts received for services rendered under the contracts are not exempt from Federal income tax.

      H. J. Hankins, Esq., for the petitioner.

      I). D. Shepard, Esq., for the. respondent.
    This is a proceeding for the redetermination of deficiencies in income tax for the calendar years 1918,1919, and 1920, in the respective amounts of $1,449.75, $1,150.65, and $2,730.74, a total of $5,381.14. The only question involved is whether the petitioner is subject to tax on the amounts received for services rendered to California irrigation and reclamation districts, which, for the purposes of this appeal the respondent admits are political subdivisions of the State of California.
    FINDINGS OF FACT.
    The petitioner is a civil engineer and in the years here involved was employed by certain political subdivisions of the State of California which are as follows, with the length of his employment in each case:
    years.
    Knights Landing River Drainage District- 14
    Sacramento River West Side Levee District- 11
    Reclamation District No. 108- 11
    Byron Bethany Irrigation District- 2
    Grenada Irrigation District_ 2
    Glenn-Colnsa Irrigation District_ 8
    In the cases of the Byron Bethany and Grenada Irrigation Districts the petitioner’s employment ceased upon completion of construction. In the other cases he is still employed as engineer for the several districts.
    The employment of the petitioner by the several districts was under resolutions of the boards of directors or trustees, as the case might be, accepting the terms submitted by the petitioner. The method and terms of his employment were substantially the same in all cases. A typical example is that of Reclamation District No. 108, which is here set forth:
    Resolution adopted by the Trustees of Reclamation District No. 108 on March 2nd, 1917.
    Maech 1st, 1917.
    Honorable Board of Trustees,
    Reclamation District No. 108,
    San Francisco, California.
    Gentlemen :
    Pursuant to your request, the writer herewith submits terms in connection with the engineering work of Reclamation District No. 108. This proposition to apply to all estimates rendered subsequent to the writers’ appointment as Engineer of your District on March 2, 1917.
    Charges for engineering services to be as follows:
    A. The actual cost of all employees on your work, both in the field and in the office, together with all necessary and proper traveling, office and incidental expenses necessary for the proper and expeditious conduct of the work contemplated and ordered by the Board of Trustees, or other officials of the District. This work will include all necessary topographic and other surveys, all necessary office work for the preparation of plans and estimates of construction, right of way plats, detailed drawings for structures, or other accessories, contracts, specifications, and supervision of construction of all work performed by your district; also monthly estimates and summaries of construction work and any other reports requested. The writer would also agree to be in attendance at the meetings of the Board of Trustees when requested, and to furnish all services requested in connection with any litigation or legal work required by your attorneys.
    B — In addition to the above, a charge of 2% of the actual construction cost of all work performed by your District. The above charges to include all overhead expenses and services of the writer.
    The said percentage of 2% to be payable at the time monthly estimates are made during the progress of construction work. The said actual cost of field and office work, together with traveling, office and incidental expenses to be payable in cash within thirty days after the rendition of monthly bills.
    The approval by resolution by your Honorable Board of Trustees of the above terms will be deemed a sufficient contract by me for the performance of the work indicated.
    Bespeetfully submitted,
    Fred H. Tibbetts,
    Engineer Reclamation Dist. No. 108.
    Haviland & Tibbetts.
    Adopted March 2, 1917.
    Thereupon the following resolution was presented by Trustee Browning, seconded by Trustee Balsdon and unanimously adopted, to-wit:
    Resolved, that Engineer Ered H. Tibbetts be and he is hereby employed as Engineer of Reclamation District No. 108 upon the terms and conditions as submitted in his letter just read, which said letter is to be spread upon the minutes of this meeting, and adopted as a part of this resolution.
    The rate of compensation was not fixed by law but was entirely a matter of contract between the petitioner and the boards of directors or trustees. The petitioner took no oath of office. His duties were performed finder the general direction of the boards and he was subject to discharge by them at any time.
    When any of the boards by whom the petitioner was employed desired his services they would so advise him, stating the work to be performed. The petitioner would then make surveys and prepare drawings and estimates of the work, which were submitted to the boards for their approval or modification. After agreement upon a plan the actual work of construction was contracted for, usually by means of advertising for bids. The duties of the petitioner then consisted of regular inspections of the construction, the supervision of any surveys necessary, and making periodical progress reports to the boards. After completion of the construction work, his duties, especially during the winter season, consisted of supervision of the maintenance and operation of the works, making periodical inspections of the works on the ground, computations and estimates of their efficiency and capacity, and rendering periodical reports to the boards or managers of the works. At times he attended meetings of the boards. All of the work of the petitioner was subject to inspection and acceptance by the boards.

      The petitioner maintained his own office. A part of the petitioner’s duties were performed by him personally and part by his employees. He usually submitted monthly bills to the districts but at times when the amounts due were small they were allowed to accumulate for several months. In some cases the district boards held meetings only once in a period of Wo or three months and in these cases the petitioner was paid at irregular intervals.
    His compensation of 2 per cent was based on the cost to the districts of the construction and maintenance of the irrigation and reclamation works.
    Only a portion of the petitioner’s time was devoted to work for the irrigation and reclamation districts. No restriction was placed on his concurrent employment by other persons or firms and he was free to accept and did accept employment from others during the years here involved.
    The petitioner reported as nontaxable income for the years involved the amounts received from the reclamation and irrigation districts by winch he was employed.
   OPINION.

ÁRUNdell:

The petitioner contends that he was an officer or employee of the political subdivisions of the State of California which are listed in the findings of fact, and' that the compensation received from them is not subject to Federal taxation. The Commissioner admits that the organizations which the petitioner served are political subdivisions of the State but denied that the petitioner was an officer or employee of them.

The Knight’s Landing Eidge Drainage District was created by an act of the state legislature (Stats. 1913, p. 109; amended, Stats. 1915, p. 546; Stats. 1917, p. 277), providing in part as follows:

Sect. 4. The Board of Drainage Commissioners shall elect one of their members as President and shall elect a secretary, who may or may not be a member of said Board, and an engineer who shall not be a member of said Board, and employ such other persons as may be necessary to assist and advise the Board * * *.
Sect. 5. The Board of Drainage Commissioners shall have power to adopt By-Laws not in conflict with general laws; to appoint an executive committee with such general powers as shall not be in conflict with general laws; to employ engineers * * ».

The Sacramento Eiver West Side Levee District was created by an act of the state legislature (Stats. 1915, p. 516; amended, Stats. 1917, p. 1211) which provided in part:

Sect. 2. The officers of said District shall consist of a Board of five levee commissioners, who shall hold office for the term of four years * * *.
Sect. 4. The Board of levee commissioners shall elect one of their members as president, and shall elect a secretary who may or may not be a member of said board, and an engineer who shall not be a member of said board, and employ such other persons as may be necessary to assist and advise the board.
Sect. 5. The Board of levee commissioners shall have power to adopt by-laws * * *; to employ engineers and others to survey, plan, locate and estimate the costs of work * * *; also to construct, reconstruct and repair and maintain and protect such, levees * * *.

Reclamation District ISTo. 108 was organized under the Reclamation Laws of the State of California (secs. 3446-3498, Deering’s Pol. Code, 1923). It is provided in these laws, under section 3454, in part as follows:

§3454. Powers of Trustees. A. Said board of trustees shall have powers and duties as follows, to wit:
* s{« * * $ % ■ % '
(6) Engineers, etc. To' employ engineers and others to survey, plan, locate and report on the works necessary for the reclamation of the lands of the district, and estimate the cost thereof; thereafter, at any time, modify or change such original plan or plans, or adopt new, supplemental, or additional plan or plans, when, in its judgment, the same shall become necessary.
* * * * * * %
(9) Labor and machinery. To employ such labor * * * and to make and enter into such contracts and agreements as they shall- deem necessary in order to accomplish the proper construction, maintenance, repair or operation .of the works of reclamation of the said district. ■

The Byron-Bethany Irrigation District, the Grenada Irrigation District, and the Glenn-Colusa Irrigation District were organized under “An act to provide for the organization and government of irrigation districts * * (Stats. 1891, p. 254; Act 3854, Calif. Gen. Laws, Deering, 1923.) This act provides in part as follows:

§15. Powers of directors. The board of directors shall have the power and it shall be their duty to manage and conduct the business and affairs of the district; make and execute all necessary contracts; employ and appoint such agents, officers and employees as may be required, and proscribe their duties.

If the amounts received by the petitioner from the irrigation and reclamation districts were received as' compensation for personal services as an officer or employee, such amounts may not be taxed in view of the provisions of section 1211 of the Revenue Act of 1926, which provides as follows:

Sec. 1211. Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation ¡is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded.

The facts in this case are close to those in Metcalf & Eddy v. Mitchell, 269 U. S. 514, as will be seen from the following extracts from the court’s opinion:

All of the items of income were received by the taxpayers as compensation for their services as consulting engineers under contracts with states or municipalities, or water or sewage districts created by state statute. In each case the service was rendered in connection with a particular project for water supply or sewage disposal, and the compensation was paid in some instances on an annual basis, in others on a monthly or daily basis, and in still others on the basis of a gross sum for the whole service.
* * * * * * *
* * * They took no oath of office; they were free to accept any other concurrent employment; none of their engagements was for work of a permanent or continuous character; some were of brief duration and some from year to year, others for the duration of the particular work undertaken. Their duties were prescribed by their contracts and it does not appear to what extent, if at all, they were defined or prescribed by statute.

The petitioner took pains to point out that his duties with the reclamation and irrigation districts were not those of consulting engineer. Whether his duties ended with consultation or extended over a wider field by following up and supervising the work after the consulting and planning features were disposed of, is not determinative of the question of whether the petitioner was an officer or employee of the political subdivision.

“An office is a public station, or employment, conferred by the appointment of government. The term embraces ideas of tenure, duration, emolument, and duties.” United States v. Hartwell, 6 Wall. 385, 393. This definition of the term “ office ” it is said in United States v. Germaine, 99 U. S. 508, 511, “embraces the ideas of tenure, duration, emolument, and duties, and that the latter were continuing and permanent, not occasional or temporary.”

In the present case the petitioner took no oath of office, was free to accept any other concurrent employment and did in fact accept such employment. His status was prescribed by contract and not by statute. So far as we are advised these contracts, although entered into by authority of law, neither could nor did operate to create an office or to give to petitioner the status of an officer. Metcalf & Eddy v. Mitchell, supra.

Petitioner’s main argument was to the effect that he was an employee of the political subdivisions enumerated above.

A similar question was considered in the Metcalf & Eddy case and it was found there that the plaintiffs were independent contractors rather than employees, the opinion on this point reading as follows:

“ * * Tbe record does not reveal to wbat extent, if at all, their services were subject to the direction or control of the public boards or officers engaging them. In eaeli instance the performance of their contract involved the nse of judgment and discretion on their part and they were required to use their best professional skill to bring about the desired result. This permitted to them liberty of action which excludes the idea of that control or right of control by the employer which characterizes the relation of employer and employee and differentiates the employee or servant from the independent contractor. Chicago, Rock Island & Pacific Ry. Co. v. Bond, 240 U. S. 449, 456; Standard Oil Co. v. Anderson, 212 U. S. 215, 227 and see Casement v. Brown, 148 U. S. 615; Singer Mfg. Co. v. Rahn, 132 U. S. 518, 523.

In the case of Casement v. Brown, cited above, one of the questions involved was whether the relation of defendants to certain railroad companies was that of employees or independent contractors. The court held that they were independent contractors, saying in part:

They did not agree to enter generally into the service of the companies, and do whatsoever their employers called upon them to do, but they contracted for only a specific work. The functions of the engineers [of the railroad companies] were to see that they complied with this contract — “ only this, and nothing more.” They were to see that the thing produced and the result obtained were such as the contract provided for.

The case of Vane v. Newcombe, 132 U. S. 220, involved the question whether or not plaintiff was an employee of a corporation within the terms of a state statute giving employees prior liens for labor performed. In the opinion the court says in part:

We think the distinction pointed out by the Circuit Court is a sound one, namely, that to be an employé within the meaning of the statute Vane “must have been a servant, bound in some degree at least to the duties of a servant, and not,” as he was, “ a mere contractor, bound only to produce or cause to be produced a certain result, — a result of labor, to be sure, — but free to dispose of his own time and personal efforts according to his pleasure, without responsibility to the other party.”

These cases cover the question here presented. The petitioner did not enter generally into the employment of the irrigation and reclamation districts; he was employed only for the purposes specified in his contracts. The contracts contained nothing which reserved to the officials of the districts any control or right of control which, as set forth in the quotation from Metcalf & Eddy v. Mitchell above, “ characterizes the relation of employer arid employee and differentiates the employee or servant from the independent contractor.”

A case in point on the question here involved is the Appeal of Robert G. Gordon, 5 B. T. A. 1047, wherein the petitioner and two others where employed under a contract entered into with the Governor of Kentucky as special counsel to represent that Commonwealth in the collection of inheritance taxes in a specific case. The compensation of the petitioner and his associates was fixed by the contract at a flat sum plus a percentage of the taxes collected. In that case we held that the petitioner was neither an officer nor employee of the Commonwealth, quoting from Louisville, Evansville & St. Louis R. R. Co. v. Wilson, 138 U. S. 501, as follows:

The terms “officers” ancl “employés” both, alike, refer to those in regular and continual service. Within the ordinary acceptation of the terms, one who is engaged to render service in a particular transaction is neither an officer nor an employé. They imply continuity of service, and exclude those employed for a special and single transaction. An attorney of an individual, retained for a single suit, is not his employé. It is true, he has engaged to render services ; but his engagement is rather that of a contractor than that of an employé.

In the Appeal of Emma B. Brunner, Executrix, 5 B. T. A. 1135, the decedent Brunner was an architect and had been engaged by the Commonwealth of Pennsylvania and the municipalities of Albany and New York, N. Y., in connection with the construction and alteration of public buildings and the construction of a bridge. His compensation was fixed in some cases on the basis of specified percentages of construction costs and in others at a flat annual sum. We held that that case, in so far as those contracts were concerned, came within the decision in Metcalf & Eddy v. Mitchell, saying in part:

The decedent was not a part of the regular governmental force of the Commonwealth of Pennsylvania or the municipalities of New York and Albany. He was an independent contractor and his rights, duties, and compensation were fixed by the contracts.

The present case falls within this line of decisions and we are of the opinion that the petitioner must be regarded as an independent contractor rather than an employee of the political subdivisions that engaged his sendees.

There is still the question of whether the imposition of a tax on the petitioner’s compensation for services rendered under the contracts amounts to an interference with the exercise of governmental functions by the State or its political subdivisions.

This question too was passed on in the Metcalf & Eddy case, in the following language:

* * * We do not suggest that there may not be interferences with such a contract relationship by means other than taxation which are prohibited. Railroad Co. v. Peniston, supra, at p. 36, recognizes that there may. Nor are we to be understood as laying down any rule that taxation might not affect agencies- of this character in such a manner as directly to interfere with the functions of government and thus be held to be void. See Railroad v. Peniston, supra, page 36; Farmers Bank v. Minnesota, supra, p. 552; Choctaw & Gulf Railway Co. v. Harrison, supra, p. 272.
But we do decide that one who is not an officer or employee of a state, does not establish exemption from federal income tax merely by showing that his income was received as compensation for service rendered under a contract with the state; and when we take the next step necessary to a complete disposition of the question, and inquire into the effect of the particular tax, on the functioning of the state government, we do not find that it impairs in any substantial manner the ability of plaintiffs in error to discharge their obligations to the state or the ability of a state or its subdivisions to procure the services of private individuals to aid them in their undertakings. Cf. Central Pacific Railroad v. California, 162 U. S. 92, 126. We therefore conclude that the tax * * * was properly assessed.

In the case before ns there is no evidence .to show that the tax imposed on the petitioner will have the effect of impairing the efficiency of any agency or instrumentality of the state government in any substantial way or amount to an interference with the exercises of a sovereign power. Neither is it shown that because of the tax the state was interfered with to any extent in securing the services of the petitioner or that it did not receive as efficient service without any additional financial or other burden on account of the tax. Appeal of Robert G. Gordon, supra.

Judgment will be entered for the respondent.