author: xvíoRRis:

text:
    John A. Dunn Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7020.
    Promulgated October 24, 1927.
    Tbe sum of $60,000 taken as a deduction in tbe petitioner’s return for tbe fiscal year ended June 30, 1920, and disallowed by respondent, held to be a reasonable salary, in addition to tbe amount allowed by tbe respondent, for tbe services performed by tbe three ofiicers to whom paid, and therefore deductible.

      Frank Owen White, Esq., for the petitionei.

      G. H. Gurl, Esq., for the respondent.
    This proceeding arises from the determination of a deficiency in income and profits tax of $25,783.69 for the fiscal year ended June 30, 1920. The only question involved is the disallowance of salaries in the amount of $60,000.
    FINDINGS OF FACT.
    The petitioner is a Massachusetts corporation located at Gardner, and is engaged in manufacturing chairs and in jobbing baled cane, cane webbing, reeds and rattan. The capital stock outstanding on June 30, 1920, was $1,000,000 composed of 6,500 shares of nonvoting preferred stock and 3,500 shares of common stock, par value $100 each. The ofiicers of the corporation were holders of the common stock in the following amounts:
    Stares
    George A. Dunn, president- 782
    K. B. Gary, vice president- 884
    Prank C. Dunn, treasurer and clerk- 796
    The remaining 1,038 shares of the common stock were held as follows:
    Shares
    Commonwealth Manufacturing Co_ 407
    Gardner Trust Co_ 100
    Dora Dunn (sister of George and Prank Dunn)_ 305
    Jennie D. Cary (sister of George and Frank Dunn)_ 210
    6 other people held_ 16
    The board of directors of the petitioner during the fiscal year 1920, was composed of the above three officers and one Joel A. Baker, who was the manager of petitioner’s Boston warehouse. George A. Dunn, K. B. Cary and F. C. Dunn were also the officers and directors of the Commonwealth Manufacturing Co., which company sells its entire output to the petitioner. The offices of both corporations are located in the same building and the plant facilities of each are adjoining. George and Frank Dunn devoted very little of their time to the business of the Commonwealth Manufacturing Co., being principally engaged by the petitioner. Cary devoted approximately 20 per cent of his time to the Commonwealth and the balance to the petitioner.
    The Dunn Company operates warehouses at Boston, Chicago, and St. Paul. The chairs and other products manufactured are shipped knocked down and unfinished from the factory to the warehouses where they are assembled and finished. The managers of the warehouses received a stated salary plus 25 per cent of the profits, and they operated practically on their own responsibility, subject to price conferences and agreements with the petitioner. For the fiscal year 1920 the Boston manager received as salary and percentage of the profits, the sum of $28,000; the Chicago manager, $34,000, and the St. Paul manager, $22,000.
    For the fiscal year 1920 the petitioner by its board of directors at a meeting held on August 22, 1919, voted the above three officers salaries of $20,000 each. Thereafter, and before the close of the fiscal year it was informally agreed by at least two of the directors, namely George A. and Frank C. Dunn that the salaries of the three officers should be increased from $20,000 to $40,000 each for the fiscal year 1920. Cary was at that time in the Orient on a business trip for the petitioner. The bookkeeper, acting under instructions from Frank C. Dunn, credited, under date of June 30, 1920, each of the three officers with additional salaries in the amount of $20,000 charging the same in equal amounts against administrative, selling and office expenses. No written record of the meeting or vote on increasing the salaries was made. The offices were so situated in the petitioner’s building that informal discussions as to policies and the conduct of the business were of daily occurrence. Minutes of such conferences were not kept although the decisions reached at such times were carried out.
    The gross sales of the petitioner for the fiscal year 1920 were the largest in its history, amounting to $2,602,318.31. The gross sales for 1919 were $1,378,747.46, while the gross sales for 1918 were $1,453,730.50. Petitioner paid salaries to its officers in 1918 in the amount of $60,000. In 1919 their salaries were $18,650 and in 1920, $120,000. For the same fiscal years after paying all charges and dividends the petitioner carried to surplus accounts $68,034.99 for 1918; $56,638.78 for 1919; and $177,717.63 for 1920. The regular 7 per cent dividends were paid on the preferred stock during these years. The usual dividend rate on common stock was 6 per cent, which was paid in 1918 and 1919, but for 1920 the dividend paid amounted to 20 per cent. During the fiscal year 1920, petitioner spent $200 for advertising.
    During the fiscal year 1920, George A. Dunn and Frank C. Dunn and K. B. Cary performed unusual services for the petitioner. They planned and supervised the construction of a two-story addition to one building, the erection of a new one-story saw mill, and a new five-story factory building. The buildings and the addition were of the type known as mill construction and the work was done by a building contractor. The completion of these buildings and the addition added a large amount of floor space to petitioner’s plant at a cost of $132,161.98. The services ordinarily performed by an architect were performed by the officers and the cost of employing an architect, ranging from 6 to 10 per cent of the cost of construction, was dispensed with. '
    During the fiscal year 1920 the three officers mapped out and conducted a selling campaign for the sale of $500,000 of new capital stock. The lowest commission for which the brokers whom the officers interviewed would underwrite the issue was 15 per cent. Of this issue $186,600 was sold by brokers at a commission of 5 per cent. The balance was sold without any commission. The three officers consulted bankers, instituted and carried out an advertising campaign in the newspapers, wrote letters, interviewed prospective customers, and spent a great deal of time in personal solicitation.
    The unit production of the petitioner for the fiscal year 1920 as to reeds, cane webbing, car seating and baled cane was more than double that of the previous year, while the output of chairs and baby carriages was increased by 11 per cent. Skilled labor was scarce so that it was necessary for the officers to give more than ordinary attention to the finished product. The public was buying a more expensive grade of furniture which required new patterns, a higher grade of workmanship, and a greater demand on the ability of its officers. The petitioner did not employ a general manager, a sales manager, an office expert, or credit manager, but the duties which such employes would ordinarily perform were handled by the two Dunns and Cary.
    The following table shows the amounts which were voted at director’s meetings as salaries to the officers and the amounts which the officers actually received during each of the fiscal years ended June 30:

    The by-laws of the petitioner provided that the directors shall fix the salaries or compensation of all the officers notwithstanding that in so doing they shall fix their own salaries or compensation.

      Tlie petitioner took complete inventory on January 1, and July 1, of each year and partial inventories of at least three-fourths of its merchandise on June 1, and December 1, to determine its financial and credit situation. The nature of petitioner’s business requires that its credit condition should be strong as it borrows heavily. Its outstanding loans at times during 1920 amounted to as much as $1,000,000. The salaries paid by petitioner to its officers are controlled to a considerable extent by the petitioner’s credit situation.
    The petitioner in its income-tax return for the fiscal year 1920 deducted $120,000 for officers’ salaries. The respondent disallowed $60,000 of that amount.
   OPINION.

xvíoRRis:

The sole question involved in this proceeding is whether, considering all the facts, salaries of $120,000 paid in equal amounts to each of three officers, constituted reasonable allowances for personal services actually rendered. The petitioner asserts that such salaries were reasonable, while respondent not only denies their reasonableness but asserts that the salaries represented a distribution of profits to the extent of $60,000.

Considering first the question of reasonableness, it appears that in addition to the duties ordinarily rendered by the three officers, in prior and subsequent years, certain unusual services were performed during the fiscal year 1920. A new issue of capital stock of $500,000 was underwritten and sold by them at a minimum expense, plans were prepared and the construction supervised of large and substantial additions to the factory, sales were increased through their personal efforts, and they increased the actual number of units produced notwithstanding the adverse labor conditions which affected them during the year. The facts further show that the three warehouse managers received compensation in excess of the amount allowed by the respondent to the officers.

The respondent seems to rely in his disallowance of the salary deduction, upon the vote of the board of directors shortly after the beginning of the fiscal year setting the salaries of the officers at $20,000 each. The record shows, however, that the directors frequently had informal meetings at which times the salaries as originally voted, were varied. In six of the seven years preceding the taxable year in question the salaries paid were different from those voted as shown in the record book, the variation being in amounts both greater and less.

Although the additional salaries were paid to the three officers in equal amounts, their stockholdings were not the same in the petitioner, nor did the three of them own all the voting capital stock, there being an outside ownership of almost 30 per cent. A dividend of 20 per cent was paid on the common stock during the taxable year, which exceeded that of the two previous years, and a much larger surplus was also carried over.

Considering all the evidence we are of the opinion that the salaries of $60,000 to the three officers, the deduction of which was disallowed by the respondent, in addition to the amount already allowed, were reasonable for the services rendered, and an allowable deduction in computing net income.

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

Considered by Teammell, Murdock, and Sieekin.


source: Caselaw Access Project

author: MoRRis:

license: Public Domain

text:
    James H. Channon Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6803.
    Promulgated October 24, 1927.
    1. Value of assets for invested capital and depreciation purposes determined.
    2. Where petitioner fails to adduce proper evidence in support of its contention that items capitalized within the taxable year should be charged to expense the deduction must be disallowed.

      Lee I. Pa/rh, Esqn for the petitioner.

      A. George Bouchard, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1917 in the amount of $17,206.40. The errors urged by the petitioner are:
    1. Refusal of the respondent to allow any greater value than $47,339.19 for invested capital and depreciation purposes.
    2. Failure of the respondent to allow as a deduction the amount of $1,789.36 representing the cost of certain items erroneously capitalized.
    FINDINGS OF FACT.
    Petitioner was organized and incorporated under the laws of the State of Illinois January 24,1917, for the purpose of engaging in the manufacture and sale of elevators, derricks, machinery of all kinds, tools and appliances, etc. The authorized capital stock of the petitioner was $100,000, divided into 1,000 shares of $100 par value.
    Coincidentally with the organization of the petitioner, Norvin Nussbaumer, Emil J. Hoag and Donald L. Morrill were appointed as commissioners pursuant to the laws of the State of Illinois to appraise the assets of the Union Elevator Machine Co. (hereafter referred to as the Elevator Company), which appraisal was made and embodied in a report to the Secretary of the State of Illinois. The amounts of said appraisal are set forth in the minutes of the board of directors of the petitioner at a meeting held on January 22, 1917, held for the purpose of considering the offer of James H. Channon to sell to the petitioner the assets of the Elevator Company of which he was owner of all the capital stock. The pertinent excerpts from the minutes of that, meeting are:
    I hereby offer to sell, assign and transfer to this company, in full payment for my subscription to the capital stock thereof, all of the personal property formerly belonging to the Union Elevator & Machine Company of which I am the sole owner, all of which is more fully shown by the inventory of said personal property dated December 31, 1916, a copy of which shall be filed with the Treasurer of this Company; also, all of the personal property acquired by said Union Elevator & Machine Company since the date of said inventory; and I further agree to pay into the treasury of this company, as needed, not less than Four Thousand Eight Hundred Dollars ($4,800.00) in cash as a working capital.
    After a full consideration of the proposition, and it appearing that the commissioners herein have appraised said property, as follows:
    Blue prints, printed matters and electros_$3, 778.95
    Machinery and tools- 28,320.36
    Patterns, shop rights, licenses and patents- 29,366.16
    Stock on hand- 25, 560. 82
    Shop and office fixtures_ 2, 421.40
    Automobile_ 400.00
    Accounts receivable_ 5,152. 31
    95, 000. 00
    It was unanimously voted that Mr. Channon’s proposition be accepted, and that the President and Secretary be authorized to issue to him certificates for 998 shares of stock upon the delivery by him of the personal property specified in said inventory and in the foregoing proposition.
    Nussbaumer and Hoag, two of the commissioners who appraised the assets of the Elevator Company, had been connected with that company for a great number of years,- Nussbaumer having been timekeeper, cost clerk, salesman and general manager and secretary, and Hoag having had charge of patterns and castings and later having been made foreman. Both were acquainted with the costs of machinery and equipment, and Hoag was particularly acquainted with the costs of patterns.
    In making the appraisal hereinabove referred to, the material on hand was valued at cost or market, whichever was lower; machinery was valued at what it could be replaced for at the time in its then condition; accounts receivable were taken from the accounts receivable ledger. A detailed inventory was not taken of patterns, shop rights, licenses and patents — they were grouped together and figured as low as possible.

      The closing balance sheet of the Elevator Company at December 31, 1916, was as follows:
    ASSETS
    Cash_$3,161.90
    Accounts receivable- 16, 534. 39
    Merchandise inventory- 25,560. 82
    Patterns_ 6,484.29
    Furniture and fixtures_ 2,594.37
    Tools_ 13,966.91
    Auto_ 375.00
    Total_ 68,677.68
    LIABILITIES
    Notes payable_$11, 000.00
    Accounts payable_ 10,338.49
    Capital stock_ 15,000. 00
    Surplus_ 32,339.19
    Total_ 68, 677.68
    The opening balance sheet of the petitioner, giving effect to this sale, is as follows:
    ASSETS
    Cash_ $3,161.90
    Accounts receivable_ 16, 534.39
    Merchandise inventory- 25, 560. 82
    Printed matter_ 518.45
    Automobile_ 400. 00
    Blue prints_ 1, 975. 00
    Cuts_ 1,285. 50
    Tools, machinery and equipment- 28,320.36
    Furniture and fixtures- 2,421.40
    Patterns_ 20, 000. 00
    Goodwill_ 21,160.67
    Total_ 121,338.49
    LIABILITIES
    Notes payable_$11,000. 00
    Accounts payable_ 10,338.49
    Capital stock_ 100, 000. 00
    Total_ 121,338.49
    The large increase in the pattern account of the petitioner over the figure shown in the closing balance sheet of the Elevator Company is accounted for by the fact that that company had charged a number of patterns to profit and loss account or to special jobs, which patterns, however, were still in use.
    The petitioner had its machinery and equipment appraised for income-tax purposes in 1922 by a consulting engineer as of January 1,1917. A summary of the figures arrived at by that appraiser is as follows:

    In arriving at the above figures the appraiser listed all of the machinery and equipment in the plant in his appraisal report in 1922, and added thereto assets which were sold, and deducted assets which were purchased between the period January 1917 to 1922. He then determined the current prices of new machinery as of January 1917, and computed the cost of reproduction at that time, and deducted therefrom depreciation from the date of acquisition, where such dates could be determined — where they could not be ascertained he determined the condition of the machine and estimated the number of years in use.
    The assets acquired by the petitioner for stock at the time of its organization in January, 1917, have been valued by the respondent for invested capital and depreciation purposes at $47,339.19, which represents the sum of the capital stock and surplus shown on the closing balance sheet of the Elevator Company of December 31, 1916.
   OPINION.

MoRRis:

The first assignment of error urged by the petitioner is refusal of the respondent to allow any greater value than $47,339.19 for invested capital and depreciation purposes in the taxable year 1917. The petitioner contends that its assets had a value at the date of acquisition for invested capital and depreciation purposes equal to the par value of the stock issued therefor.

The facts are that Norvin Nussbaumer, E. J. Hoag, and Donald Morrill organized the petitioning corporation in January, 1917, to engage in substantially the same business as that theretofore engaged in by the Elevator Company, at which time James H. Channon, owner of all of the capital stock of the said Elevator Company, offered to sell the assets of that company to the petitioner for 998 shares of capital stock of the petitioner, which offer was duly accepted and the sale was so consummated. At or about the same time, Nussbaumer, Hoag, and Morrill, proceeding under the laws of the State of Illinois, appraised the assets of the Elevator Company at a figure of $95,000.

Hoag and Morrill appeared personally at the taking of depositions in this case and testified at length as to their services with the petitioner and its predecessor and the nature of their experience therewith, which experience, in our opinion, qualified them to place a value on these assets. They testified that the inventory of materials was taken by actual count and that the cost or market, whichever was lower, was used; that the machinery was priced at what it would bring second hand; that the patterns were lumped and priced as a lot. The testimony disclosed that it was the practice of the petitioner’s predecessor to charge a number of patterns to its profit and loss account and to special jobs which accounts for the considerable increase in the value of patterns placed upon the petitioner’s books.

In 1922, petitioner employed a consulting engineer to make an appraisal of its assets as of January, 1917, when the sale here in question took place, which appraisal was made and a lengthy detailed report rendered thereon. This appraiser appeared personally at the taking of depositions in this case and he testified at great length as to his qualifications to make such an appraisal. He testified that he took all of the assets in the plant by actual count and listed them and that he deducted therefrom the purchases and added thereto the sales as shown by the books of account between the period January, 1917, to the time of making his appraisal in 1922. He then determined the current market price of similar machinery and equipment and applied depreciation on each item for the period of time it had been in use, thereby arriving at the cost of reproduction in January, 1917, of $92,102.07, which figure greatly exceeds the values placed on machinery and equipment by Nussbaumer and Hoag at the time of the organization of the petitioner.

This witness further testified that a committee was appointed consisting of Hoag and Nussbaumer at the time of making his appraisal in 1922 and that they took each pattern separately, examined it carefully, if it was metal they weighed it and if it was wood they calculated the amount of material, etc., entering into the cost thereof and in this manner determined the cost of each pattern.

We are not called upon to accept the testimony of witnesses, Nuss-baumer and Hoag, as conclusively establishing the cash value of these assets at January, 1917, nor are we asked to accept an appraisal report made by a disinterested appraiser in 1922 to substantiate these values. We have the combined testimony of the witnesses who made the appraisal in 1917 and the witness who made the appraisal in 1922 which we believe satisfactorily establishes the value contended for by the petitioner. We, therefore, hold that the assets, exclusive of any good will which may have existed, received by the petitioner in 1917 in exchange for stock had a cash value equal to the par value of the stock issued therefor, and that those values should be used for invested capital and depreciation purposes.

The assets in question having been sold and transferred prior to March 3, 1917, the provisions of section 208 of the Revenue Act of 1917 are not applicable. Appeal of Henderson Overland Co., 4 B. T. A. 1088.

The second assignment of error relates to certain items of expense, amounting to $1,789.36, alleged by the petitioner to have been capitalized in 1917 in error. A detailed list of these expenditures was made a part of the petition filed with the Board. At the time of taking depositions in this case, counsel for the petitioner did not have the original list of these items and realizing that exhibits attached to the petition are not evidence before the Board until offered as such, he attempted to stipulate with respondent’s counsel that the list filed with the petition be accepted in evidence, which respondent’s counsel did not do. After some discussion on the subject, respondent’s counsel agreed that if the original was attached to the petition and was properly admissible, he would not object on the ground that it was not properly identified. He further said, however—

If I care to make any objection to the merits at the time you offer it [meaning at the time of the hearing] I reserve the right to do so, but not because it isn’t properly identified.

This detailed list was not offered in evidence at the time of the hearing, consequently counsel for the respondent was not afforded the privilege of cross-examination nor an opportunity to object to the merits of this issue. We are, therefore, of the opinion that this issue has not been properly evidenced and that we can not, therefore, allow the sum of $1,789.36 as a deduction.

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

Considered by Trammell, Murdoch, and Siefkin.


author: Trussell:

text:
    Mary Elizabeth Moorhouse, Julia B. Moorhouse, O. B. Moorhouse, and O. B. Moorhouse, Administrator, Estate of Abraham Moorhouse, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5101.
    Promulgated October 24, 1927.
    1. Evidence held to establish that at the date of his death the decedent was the owner of a one-half interest in the business and assets of the partnership carried on under his name.

      2. The value of certain items of the assets of said partnership determined.

      James G. Davis, Esq., and E. A. Robb, Esq., for the petitioners.

      J. W. Fisher, Esq., for the respondent.
    In the audit of an estate-tax return made on behalf of the estate of Abraham Moorhouse, deceased, the Commissioner denied the claim that a certain mercantile and grain business carried on under the name and style of “A. Moorhouse, Lumber, Grain, and Coal,” was the business of a partnership composed of the said A. Moorhouse and his children, Julia B. and O. B. Moorhouse, and included in the gross estate of the deceased a value of all the assets of said partnership. He also increased the value of certain items of such assets and on that basis computed a deficiency in estate tax amounting to $1,438.35, for the redetermination of which the petitioners bring this action.
    FINDINGS OF FACT.
    The decedent, Abraham Moorhouse, died September 8, 1923, a resident of Glidden, Iowa. For many years prior to July 1, 1905, the decedent had carried on a business under the name and style of “A. Moorhouse, Lumber, Grain, and Coal.”
    In the spring of 1905 the decedent was 65 years old; his daughter, Julia B. Moorhouse, was of age, residing with her parents, and employed as bookkeeper for her father’s business. His son, O. B. Moorhouse, was also of legal age and had graduated from the Ames, Iowa, School of Engineering in the summer of 1904, was still living with his parents, and employed in his father’s business. At this time the decedent, with a view of providing for his children and keeping his family and his business together, gave to each, Julia B. and O. B. Moorhouse, a one-fourth interest in his mercantile and grain business, and thereupon the decedent and his two said children formed a partnership for carrying on said business and continuing the operation of the same under the name and style of “A. Moorhouse, Lumber, Grain, and Coal.” This partnership continued without substantial change or interruption to the date of the death of Abraham Moorhouse.
    At the time the partnership became effective in 1905, the assets of the partnership, consisting of grain elevator, lumber and coal sheds, merchandise, cash, accounts and notes receivable, aggregated nearly $42,000. During the following 18 years much of the profits of the business were retained in the partnership accounts and invested in enlarging the properties used in the business and also in the purchase of stocks, securities, and properties of other enterprises. In some instances when stocks of other corporations were purchased with partnership funds they were taken in the name of A. Moorhouse.

      Among the assets and properties of the said partnership at the time of decedent’s death were—
    (a) 180 shares capital stock of First National Bank of Glidden. The value of this bank stock on September 8, 1923, was $27,000.
    (5) A grain elevator building, situated on railroad right of way at Ralston, Iowa. The value of this building and its equipment on September 8, 1923, was $4,000.
    (c) 200 shares of capital stock of the North American Timber Holding Company. The value of this stock on September 8, 1923, was $5,000.

      (d) 4 shares of the capital stock of the Glidden Cement Company. On September 8, 1923, this stock was worthless.
    The decedent, Abraham Moorhouse, on September 8, 1923, held and owned a one-half interest in the assets and business of said partnership.
   OPINION.

Trussell:

The testimony appearing in the record of this action conclusively establishes that on or before July 1, 1905, Abraham Moorhouse and his two children, Julia B. and O. B. Moorhouse, entered into a partnership for carrying on a grain, lumber, and coal business, and that in that partnership A. Moorhouse retained a 50 per cent interest and that he gave to each of his children a one-fourth interest. Further testimony concerning the conduct of that business from 1905 to 1923 is convincing that the partnership had continued without interruption and without change and that at the date of the death of A. Moorhouse he owned only 50 per cent interest in the assets of that business. The original partnership agreement, although not evidenced by any written instrument, was valid and binding at the time it was made and by the continued conduct of the partnership remained valid and binding until the death of one of the partners. Cf. Smith v. Smith, 179 Iowa 1365; Sullivan v. Sullivan, 99 N. W. 1022. The record further establishes that the properties and investments which were added to the partnership assets were purchased with partnership funds and although some of them were taken in the name of A. Moorhouse they were the property and assets of the partnership. Cf. Lutz v. Billick, 172 Iowa 546; York v. Clemins, 41 Iowa 95, 101.

Respecting the value of the stock of other corporations here in dispute, the record contains the testimony of the surviving partners and also of the president of the First National Bank of Glidden, Iowa. This is the testimony of persons well qualified to give opinion evidence of value of the properties in question. It is uncontradicted and in our opinion clearly establishes the values hereinabove set forth in the findings of fact. Respecting the value of the elevator building at Ralston, the respondent produced testimony of a revenue agent who had made a report concerning the estate-tax return here under consideration. It is apparent, however, from the record that the revenue agent misunderstood the information which he undertook to gather and reported to his superiors the value of the Ralston elevator and its contents at the time he made the inquiry and not its value as of September 8,1923. All the other testimony in the record establishes the value of this elevator on September 8, 1923, as $4,000.

The deficiency may he redetermmed in accordance with the foregoing fundings of fact and opinion upon 15 days’ notice, pursuant to Rule 50, and judgment will he entered accordingly.

Considered by LittletoN, Smith, AND Love.


author: Trttssell:

text:
    MacAdam & Foster, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10443.
    Promulgated October 24, 1927.
    Moving Expense. — The expense of physically moving petitioner’s machinery from one location to a new location held not to constitute an improvement or capital expenditure, but rather an ordinary and necessary business expense.

      Edward H. Lockwood, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income tax in an amount less than $10,000 for the calendar year 1920.
    The petitioner alleges that the Commissioner erred in disallowing a deduction taken as an ordinary and necessary business expense for the cost of moving petitioner’s machinery to a new location.
    FINDINGS OF FACT.
    MacAdam & Foster, Inc., was incorporated under the laws of New York on or about January 1, 1920, and is engaged in the business of manufacturing paper boxes at No. 103 Lexington Avenue, Brooklyn.
    Prior to January 1, 1920, A. E. MacAdam & Co., Inc., conducted at No. 97 Lexington Avenue, Brooklyn, one department of its business where paper boxes were manufactured. A. E. MacAdam was the president and Alfred E. Foster, Jr., was the secretary of the said corporation, and those two men held practically all of the outstanding stock. The paper-box department was organized during 1919, at which time new machinery was purchased, installed and operated at No. 97 Lexington Avenue.

      During December, 1919, MacAdam and Foster decided to incorporate the paper box department as a separate business and the petitioner was organized for that purpose. MacAdam and Foster took practically all of the stock and Foster was made president of petitioner. On January 1, 1920, petitioner purchased from A. E. MacAdam & Co., Inc., all of the machinery used in its paper box department for the amount which said machinery cost A. E. MacAdam & Co., Inc., including cost of installation, less the depreciation sustained during 1919. At the time the said machinery was purchased it was known that it would be moved to No. 103 Lexington Avenue as soon as the new building on those premises could be completed. The petitioner operated its plant at No. 91 Lexington Avenue during January and February, 1920, and paid rent to A. E. MacAdam & Co., Inc., owner of the building, for the space occupied. About March, 1920, petitioner moved its machinery and equipment to its new location at No. 103 Lexington Avenue at a cost of $1,400, of which amount $3,000, was the actual cost of physically moving the machinery from one building to another and $1,400, was the actual cost for connecting up the machinery in the new location and also for new motors.
   OPINION.

Trttssell:

When machinery is purchased and set up ready for use, the cost installation is naturally a part of the original cost of such machinery and constitutes a capital expenditure, for the machinery is not ready for use until installed and, also the installing of machinery constitutes an improvement. In the case at bar A. E. MacAdam & Co., Inc., purchased, installed, and operated machinery for manufacturing paper boxes and on January 1, 1920, the petitioner took over the plant and continued the operations. The petitioner purchased the machinery as it stood ready for operations and paid the amount which it had cost A. E. MacAdam & Co., Inc., including the original installation cost, less sustained depreciation. Petitioner operated its plant at No. 97 Lexington Avenue for two months, paid rent for the space occupied and then moved to a new location at No. 103 Lexington Avenue. The expense of physically moving the machinery from one building to the other amounted to $3,000, which was not an installation cost or improvement made, but rather a business expense of moving from one location to another. Such an expense is certainly an ordinary and necessary business expense within the meaning of section 234 (a) (1) of the Revenue Act of 1918. Petitioner is entitled to a deduction in the amount of $3,000 from gross income for the year 1920.

Order of redetermmation will be entered v/pon 15 days' notice, pursuant to Bule 50.

Considered by Littleton, Smith, and Love.


author: Teussell:

text:
    Lucy E. Brodbeck, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11647.
    Promulgated October 24, 1927.
    Deduction of Expenses. — Petitioner, during 1921, was engaged in tbe real estate business and is entitled to a deduction for the ordinary and necessary expenses of that business.

      Charles I. ParrleU, Esq., for tbe petitioner.

      PMUp M. Clark, Esq., for tbe respondent.
    This proceeding results from respondent’s assertion of a deficiency in income tax against this petitioner in the amount of $373.87 for the calendar year 1921.
    Petitioner alleges that respondent erred in disallowing the deduction of $10,210.63 representing petitioner’s real estate business expenses paid during the year 1921.
    FINDINGS OF FACT.
    Petitioner’s husband, prior to his death in 1919, had been a real estate operator and developer and he left considerable property but no accounts. Petitioner took over the business and employed her brother, George R. Jackson, to manage her affairs. During 1921 the real estate business was continued and an office was maintained in the Evertt Building, Akron, Ohio. Jackson, who did not know a great deal about accounting, set up a simple set of books in which were entered all receipts and disbursements. During the year 1921 petitioner’s real estate business paid the following expenses:
    Salaries_$6, 896. 50
    Office rent_ 480. 00
    Interest on borrowed capital- 917. 02
    Advertising, telephone, light, stationery and transpor-tation_ 1,403. 78
    Legal expense- 513.33
    Total_10,210.63
    Salaries paid were to Jackson, $1,200; to a stenographer, $824; and to one H. S. O’Neil, $4,872.50, for directing and conducting a campaign for the sale of petitioner’s property holdings. Petitioner’s office rent was $40 per month. At the beginning of the year 1921 the total indebtedness for money borrowed from banks for use in the real estate business amounted to approximately $22,000, and at the close of that year such indebtedness had been paid off to the extent of approximately $10,000. The books showed interest paid in the amount of $917.02. The balance of the expenses were incurred in the conduct of the business and were entered in the books as paid.

      Jackson made out petitioner’s return for the year 1921, showing no tax liability.
   OPINION.

Teussell:

The testimony contained in the record of this action clearly establishes the fact that during the year 1921 the petitioner, as the successor of her deceased husband, was carrying on a general real estate business; that the amount of $10,210.63 was the ordinary and necessary expense of carrying on that business, and, under section 214 (a) (1) and (2) of the Revenue Act of 1918 that amount should be allowed as a deduction from gross income.

There is no deficiency for the year 1921.

Judgment will he entered for the 'petitioner.

Considered by Littleton, Smith, and Love.


author: Tktjssell :

text:
    Climax Spinning Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7433.
    Promulgated October 24, 1927.
    Ordinary and Necessary Expenses. — An amount contributed by tbe petitioner toward the maintenance of the village baseball team during the year 1920 held not to have been an allowable deduction as an ordinary and necessary expense or otherwise.

      E. 8. Parrlcer, Jr., Esq., for the petitioner.

      A. R. Marrs, Esq., for the respondent.
    The petitioner complains of a deficiency in the amount of $13,-433.36, income and profits taxes for the calendar year 1920, and alleged in the petition that in the determination of such deficiency the Commissioner disallowed a deduction of $2,187.09 as an ordinary and necessary expense and denied assessment under the provisions of section 328 of the Revenue Act of 1918. At the trial the claim for special assessment under section 328 was withdrawn.
    FINDINGS OP FACT.
    During the year 1920 the petitioner was one of five corporations engaged in the operation of cotton mills in the village of Belmont, N. C. Belmont then had a population of about 3,000 people, between 800 and 900 of whom were employees of the five cotton mills.
    By agreement among the directors and managers of these five mills it was arranged that the five mills should, acting together, finance a village baseball team during the season of 1920, each mill paying its proportion of the expense of maintaining such baseball team. A manager for tbe team was hired and he employed players. Some of the players may have been employees of the cotton mills and other players were hired from outside the village. The ball team operated during the season of 1920 and the petitioner’s share of the expense of financing the team was $2,187.09, which the petitioner paid and claimed as an expense deduction in its income-tax return for the year 1920. The Commissioner disallowed this deduction.
   OPINION.

Tktjssell :

The record of this action contains much testimony concerning the business and labor conditions in the village of Belmont and in other neighboring towns where cotton mills and other industries are located. It also appears from the testimony that in the village of Belmont, and neighboring towns the interest in baseball was at its height in the year 1920; that many of the other towns had ball teams which attracted the attention of mill employees and there was much enthusiasm for the town or village having a good ball team, and that after consultation between the directors, managers, and superintendents of the five mills at Belmont it was determined that it would be a good thing for the mills to have a ball team connected with tlieir village and it was expected that the maintenance of the ball team would have a beneficial effect on the employees of the mills and result in a diminution of labor turnover.

It seems to be established that the management of the five Belmont mills went into this baseball enterprise very largely, if not fully, as a business proposition and in the expectation that the mills would profit as a result of the maintenance of the ball team.

The Bevenue Act of 1918 provides that corporate taxpayers may deduct from gross income all the ordinary and necessary expenses of carrying on a corporate business, and there can be no proper question that the mangement of the corporation must be allowed a considerable latitude for the exercise of judgment as to what constituted ordinary and necessary expenses. On the other hand we believe it must be conceded that in the administration of the income-tax laws Congress intended that the administrative officer should have the power and authority to scrutinize claims for deductions from gross income to the end that the exercise of prudent business judgment on the part of corporate officers might not be abused to the extent of unreasonably reducing the amount of gains and profits which should be subject to the income tax. In the exercise of this discretion the Commissioner has disallowed the deduction which is the basis of this action and the Board must now review the Commissioner’s action and determine whether the deduction should have been allowed.

In several cases already passed upon by the Board, we have allowed deductions from gross income of amounts disbursed by corporations for purposes not wholly connected with the operation of the business, and in discussing those cases we have seemingly adopted the rule that there is no hard and fast line between expense items which may be deducted and those which may not be deducted, and it has become a settled rule of the Board that each case of this character must stand upon its own individual merits.

Reviewing the evidence contained in this record, we are not impressed with the petitioner’s contention that the maintenance of a village baseball team during the year 1920 in the village of Belmont was necessary to the successful operation of the petitioner’s business during that year. It appears that any benefits flowing to the petitioner from the maintenance of such ball team are too remote to be capable of identification and the record in the instant case does not establish any benefits in the petitioner’s business. We are, therefore, of the opinion that the deduction complained of was properly disallowed.

The deficiency is $13,Jf33.36. Judgment will be entered accordingly.

Considered by LittletoN, Smith, and Love,


author: Trammell :

text:
    Mrs. C. H. Robinson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8271.
    Promulgated October 24, 1927.
    Petitioner was a member of a partnership which is entitled to return its income from installment sales by the use of the installment method as prescribed by subdivision (d) of section 212 of the Revenue Act of 1926.

      Philip G. Sheehy, Esq., for the petitioner.

      M. E. McDowell, Esq., for the respondent.
    In this proceeding the Commissioner determined a deficiency in income tax for the year 1919 in the amount of $536.98, and overas-sessments for the years 1920 and 1921, in the amounts of $38.78 and $59.87, respectively. The issue is whether the net income of the partnership, of which the petitioner is a member, should be computed on the installment basis. It was stipulated that facts in the case of Wa/rren Reilly, 7 B. T. A. 1327, involving the same partnership income as is involved in this case, are applicable here and that the Board might determine the facts in the case on the testimony adduced in that case.

      FINDINGS OF FACT.
    During the years involved in this appeal petitioner was a member of the copartnership of Robinson & Sons Co. The partnership was regularly engaged in selling furniture and household furnishings and equipment on the installment plan. Sales were also made for cash and on open account. From 40 to 50 per cent of the total sales made in each year were on the installment plan.
    In the case of sales on the installment plan, the purchasers executed a conditional sales contract which provided, among other things, that title to the property described therein remained in the vendor until full payment was made. The initial payments were usually from 20 to 25 per cent of the selling price of the goods; but some sales were made with a smaller initial payment, if the purchaser was known to be reliable and the monthly payments large. The deferred payments were often extended over periods of 18 months to 2 years.
    A cash discount of 10 per cent was allowed to purchasers who purchased for cash, and on open account if payment was made within the required time.
    The partnership maintained a ledger account with each purchaser of goods on the installment plan. Upon execution of a conditional sales contract, the purchaser’s account was charged with the full purchase price of the goods and credited with the initial payment. Thereafter, the account was credited with the deferred payments as and when made.
    The partnership’s books of account were maintained upon the accrual basis. Prior to 1919, all installment sales were treated as closed and completed transactions of the year in which made. At the close of the years 1919, 1920, and 1921, there were charged against profit and loss and credited to unpaid profit account, the amounts of $7,000, $6,300, and $3,100, respectively, representing certain percentages of the estimated deferred payments on installment sales remaining unpaid at the close of each year. The amounts charged against profit and loss and set aside to unpaid profits account for the years 1919 and 1920 were added to the income of the years 1920 and 1921, respectively.
    The gross sales, the cost of goods sold, the gross profit, and the percentage which the gross profit is of the gross sales, for the years 1918 to 1921, inclusive, as shown by the partnership’s books of account, are as follows:

      The deferred payments on installment sales unpaid at the close of the years 1919, 1920, and 1921, and the years in which the sales, to which such deferred payments related, were made, are as follows:

   OPINION.

Trammell :

The Commissioner has determined overassessments for the years 1920 and 1921; hence, we are without jurisdiction to determine the issues pertaining to these years. R. P. Hazzard Co., 4 B. T. A. 150; Cornelius Cotton Mills, 4 B. T. A. 255; Warren Reilly, 7 B. T. A. 1327.

This case is controlled by the decision of the Board in the case of Warren Reilly, supra, wherein we determined the issues involved with respect to the income for the same partnership of which the petitioner was a member for the same year.

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

Considered by Morris, Murdock, and Siefkin.


author: Trammell:

text:
    Henry M. Leland, Petitioner, v. Commissioner of Internal Revenue, Respondent. Wilfred C. Leland, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7768, 7769.
    Promulgated October 24, 1927.
    Petitioners filed tax returns for tbe year 1917 on March 30, 1918, and thereafter, on December 1 and 31, 1922, respectively, entered into agreements in writing with the Commissioner whereby they consented to a determination, assessment and collection of the amount of tax for 1917, irrespective of any period of limitation. In February, 1923, and January, 1924, additional taxes were assessed against petitioners for 1917, and both were jeopardy assessments. On April 11, 1923, the Commissioner announced that “ unlimited waivers for 1917 ” would be held to expire April 1, 1924. On August 4, 1925, respondent finally determined the deficiencies herein, and mailed deficiency notices to petitioners. Held, that collection of the taxes involved herein is barred by the statute of limitations.

      Jacob Mert&ns, Jr., Esq., and Elmont B. Hazard, Esq., for the petitioners.

      Harold Allen, Esq., for the respondent.
    These two proceedings, which were consolidated for the purpose of hearing and decision, are for the redetermination of .deficiencies in the amount of $23,210.29 in the case of Henry M. Leland, and $28,057.30 in the case of Wilfred C. Leland, income and profits taxes for the year 1917.
    By order of the Board the hearing was limited to the issues of law and fact as to the application of the statute of limitations in each of these proceedings. Of the deficiencies for 1917, 1919, and 1920, 1917 is the only year in which the issue is raised as to the statute of limitations.
    FINDINGS OP PACT.
    On March 30, 1918, both the petitioners filed their income-tax returns for the taxable year ended December 31, 1917. In February, 1923, the Commissioner assessed an additional tax of $36,703.81 against Henry M. Leland and in January, 1924, assessed an additional tax of $36,761.44 against Wilfred C. Leland. Both of the additional assessments were for the taxable year 1917, and were jeopardy assessments.
    Henry M. Leland entered into an agreement in writing with the Commissioner dated December 1, 1922, whereby he and the Commissioner consented to a determination, assessment and collection of the amount of income and excess-profits taxes for the taxable year 1917, irrespective of any period of limitation. This agreement was as follows:
    In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, H. M. Leland of Detroit, Mich, 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 H. M. Leland for the year 1917 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 limitations.
    W. C. Leland entered into a similar agreement with the Commissioner, dated December 31, 1922.
    On April 11, 1923, the Commissioner forwarded a letter to collectors of internal revenue, internal revenue agents in charge, and others, which letter was. subsequently published in the Internal Revenue Bulletin of the Treasury Department. The mimeographed letter so forwarded reads as follows:

      TReasuey Department,
    Office of the Commissioner of Internal Revenue,

      Washington, D. C., April 11, 1923.

    Unlimited Waivers for 1917 Held to Expire April 1, 1924.

      To Collectors of Internal Revenue, Internal Revenue Agents m Charge ana Others Concerned,:

    The form of waiver now in use extends the time in which the assessment of 1917 income and excess profits tax may be made to one year from the date of signing by the taxpayer. Inasmuch as there are many waivers on file signed by taxpayers containing no limitation as to the time which assessments for 1917 may be made, all such unlimited waivers will be held to expire April 1, 1924.
    (Signed) D. H. Blair,

      Commissioner.

    On August 4, 1925, the respondent mailed to the petitioners herein deficiency notices advising of the deficiency in the case of Henry M. Leland of $23,210.29 and in the case of W. C. Leland in the amount of $28,057.30.
   OPINION.

Trammell:

From the pleadings and the deficiency notice introduced in evidence, it appears that the deficiencies here involved are portions of the amount of additional taxes which were assessed in February, 1923, and January, 1924, respectively. These being jeopardy assessments, the Commissioner did not finally determine the deficiencies until the letter of August 4, 1925.

The issue involved is whether the collection of the tax for 1917 was barred by the statute of limitations at the time of the mailing of the deficiency notices by the respondent. In the case of Wirt Franklin, 7 B. T. A. 636, we held that unlimited income and profits-tax waivers consenting to the determination, assessment and collection of tax for the year 1917 expired on April 1, 1924, by virtue of the Commissioner’s letter of April 11, 1923. The facts here can not be distinguished from the facts in that case, and upon authority of that case we must hold that the collection of the tax involved in these two proceedings for the year 1917 is barred by the statute of limitations.

The proceedings will be restored to the General Calendar for hearing in due course upon the issues raised as to the years 1919 and 1920.

Judgment of no deficiency for the year 1917 will he entered.

Considered by Morris, Murdock, and Siefkin.


text:
    Wirt Franklin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9267.
    Promulgated October 24, 1927.
    The deficiency asserted for 1916 is under the facts barred by the statute of limitations.

      F. H. Bryan, Esq., for the petitioner.

      Orris Bennett, Esq., for the respondent.
    This proceeding involves a deficiency in income tax in the amount of $21,459.08 for the year 1916 and came on for hearing upon the issue as to whether the statute of limitations was a bar to the assessment and collection of the tax in controversy.
    FINDINGS OF FACT.
    The petitioner is a resident of Ardmore, OMa.
    He filed his income-tax return for the year 1916 with the collector for the district of Oklahoma on March 1, 1917. The return showed a tax liability of $7,117.73, which was duly assessed and paid. Thereafter, in April, 1920, the respondent assessed an additional tax against the petitioner in the amount of $32,137.34 and on June 19, 1920, the petitioner filed with the collector of internal revenue a claim for abatement covering the additional tax. The claim was allowed in part and rejected in part, and the deficiency notice was mailed to the petitioner on September 23, 1925, and the petitioner filed his appeal with the Board on November 20, 1925.
    Thereafter, the petitioner gave his bond with sureties to the collector of internal revenue in the amount of $45,000, the condition of which was that if upon the hearing of the appeal by the Board a decision should be rendered disallowing or setting aside the determination of the said deficiency in tax in full the obligation should be null and void, otherwise to remain in full force and effect for the payment of so much of the said deficiency in tax as the Board might determine to be lawfully due.
    Under date of October 31, 1925, the collector of internal revenue for the district of Oklahoma made demand upon the petitioner for the. payment of the tax, with interest. Thereafter under date of November 10, 1925, the collector made the second demand upon the petitioner for the payment of the tax together with a penalty of 5 per cent and interest.
    On November 11, 1925, the collector filed notice of tax lien with the county clerk, Oklahoma County, State of Oklahoma, covering the alleged deficiency in tax for 1916.
    The petitioner and Commissioner did not consent in writing to the determination, assessment and collection of the tax for the year 1916 after the expiration of five years from the date of the filing of the return for that year. Under date of December 22, 1926, petitioner wrote the chief clerk in the office of the collector of internal revenue, district of Oklahoma, that he refused to sign any waiver covering his tax for 1916.
    No distraint proceedings have been instituted against the petitioner for the collection of the alleged deficiency nor has any suit been instituted in the United States District Court for the Eastern District of Oklahoma, in which judicial district Ardmore is located, by either the United States or the collector of internal revenue, against the petitioner for the collection of the tax involved.
   OPINION.

Trammell:

The question presented for determination is whether the collection of the alleged deficiency of $21,459.08 is barred by the statute of limitations.

The assessment of the alleged deficiency herein was made in April, 1920. Thereafter, the (Revenue Act of 1921 was passed, November 23, 1921, which contains in section 250 (d) the following provisions:

* * * The amount of any such taxes due under any return made under * * * prior income, excess-profits or war-profits tax Acts * * * shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment and collection of the tax; and no suit or proceeding for the collection of any such taxes due * * * under prior income, excess-profits or war-profits tax Acts * * * shall be begun, after the expiration of five years after the date when such return was filed * * *.

The above section was construed by the United States Supreme Court in the case of Bowers v. New York & Albany Lighterage Co., 273 U. S. 346. The question in that case was whether the distraint was a proceeding within the purview of that section. The court held that distraint was a proceeding within the meaning of the Act and was barred by the section five years after the date the return was filed, even though the taxes were duly assessed within the five-year period provided by that section. The court in that case said:

Tbe purpose of the enactment was to fix a time beyond which steps to enforce collection might not be initiated. The repose intended would not be attained if suits only were barred, leaving the collector free at any time to proceed by distraint. In fact, distraint is much more frequently resorted to than is suit for the collection of taxes. The mischiefs to be remedied by setting a time limit against distraint are the same as those eliminated by bar against suit.
* >K $ # $ & ‡
* * * That it was the intention of Congress by the clause here in question to protect taxpayers against any proceeding whatsoever for the collection of tax claims not made and pressed within five years.

The only exceptions to the running of the statute of limitations provided in the above quoted section of the statute are (1) when both the Commissioner and the taxpayer consent in writing to a later determination, assessment and collection of the tax, (2) in the case of false or fraudulent returns with intent to evade taxes, (3) failure to file the required return, (4) cases coming within the scope of paragraph (9) of subdivision (a) of section 214 or paragraph (8) of subdivision (a) of section 234, or (5) cases of final settlement of losses contingently allowed by the Commissioner pending a determination of the exact amount deductible.

None of the exceptions are applicable to this case. There was no consent in writing to a later determination, assessment or collection, nor is there any question presented as to a false or fraudulent return, nor does the case come within the scope of the other exceptions.

The respondent contended that the statute of limitations in this case was suspended or started to run anew by the filing of the claim for abatement, by the giving of the bond and the letter of the petitioner to the chief clerk in the office of the collector of internal revenue. That is, to our minds not sufficient to suspend the operation of the statute of limitations. They do not come within any of the exceptions to the statute. We see nothing in any of the instruments referred to or the procedure followed, which would be a basis for the application of the doctrine of estoppel. The letter of December 22, 1926, clearly set forth the position of the petitioner that he refused to sign the waiver. The bond that was given was in connection with the appeal to the Board of Tax Appeals and by its terms was conditioned upon a decision of the Board that the tax was lawfully due. Otherwise, it was to become null and void.

In view of the foregoing, it is our opinion that the collection of the tax involved is barred by the statute of limitations. There is therefore no deficiency in respect of the tax involved.

Judgment will be entered for the fetitioner.

Considered by Moekis, Muedock, and Siefkin.


author: TRAmmell:

text:
    Leon Salomon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12231.
    Promulgated October 24, 1927.
    Community Property. — Petitioner and his wife in 1921 were residents of California. For that year they filed separate returns, the wife reporting as income the salary paid her by the petitioner for services rendered him in his business, which salary she had invested. The household expenses were paid by the petitioner.
      Helé, that the Commissioner erred in including the salary of the wife in the income of the petitioner.

      Jerome H. Bayer, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax in the amount of $300.88 for the calendar year 1921. The question involved is whether under the laws of California and the Revenue Act of 1921 the Commissioner erred in including in the income of the petitioner an amount claimed to represent the separate income of the wife of the petitioner.
    It was stipulated that the issues of fact should be determined solely upon the evidence offered in the case of Leon Salomon, Docket No. 3725, save and except the year and the amount of alleged deficiency involved. The above-entitled case was decided by the Board September 17, 1926, and is reported in 4 B. T. A. 1109.
    FINDINGS OF FACT.
    The petitioner is an optician engaged in business in San Francisco, Calif. During the taxable year involved he was married and living with his wife in the State of California. During the past 10 years the petitioner’s wife, Della B. Salomon, has assisted him in his business by acting as bookkeeper, keeping rocords, sending out notices, and performing other clerical duties in the office. The duties of the wife in the office of the petitioner occupied the greater part of her time. For the year involved the petitioner paid his wife a salary of $300 per month, or $3,600 for the year, which she invested in certain bonds. The petitioner paid the household expenses of himself and of his wife.
    The petitioner and his wife filed separate income-tax returns for the year 1921. The petitioner in his return claimed, among other deductions, one for salaries and wages in which was included the amount of $3,600 paid to his wife. The petitioner’s wife in her return reported, among other items of income, the amount of $3,600 as salary received from the petitioner.
    The Commissioner computed the deficiency here involved by including in income the item of $3,600 based upon an amended return filed by a revenue agent under section 3176 of the Revised Statutes.
   OPINION.

TRAmmell:

This case is controlled by our decision in the case of Leon Salomon, 4 B. T. A. 1109, in which the same state of facts for 1922 was considered. There we held that the Commissioner erred in including in the income of the petitioner the salary, of the petitioner’s wife in the amount of $3,600.

Judgment will be entered for the petitioner on IB days' notice, under Rule 50.

Considered by Mokhis, Mtordock, and Siefkin.


author: Lansdon:

text:
    Hammond L. Kington, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. W. Kington, Petitioner, v. Commissioner of Internal Revenue, Respondent. O. M. Kington, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. W. E. Davis, Petitioner, v. Commissioner of Internal Revenue, Respondent. George M. Kington, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. W. Jones, Administrator, Estate of Mrs. E. W. Jones, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. J. Ries Trathen, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Omer J. Oates, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8216, 8217, 8409, 8219, 8392, 8218, 8270, 8393.
    Promulgated October 24, 1927.
    1. The fair market price or value of certain shares of stock at March 1, 1913, determined.
    2. Liquidating dividends properly credited with prorated amounts of Federal taxes due by a dissolved corporation in the years in which such tax was paid.

      E. J. Wells, Esq., for the petitioners.

      L. C. Mitchell, Esq., for the respondent.
    The Commissioner has asserted deficiencies and penalties for the years 1920, 1921, and 1922, as follows:

    Three issues are involved: (1) Value, per share, of certain stock at March 1, 1913; (2) deductibility of taxes for previous years from liquidating dividends; and (3) whether the penalties asserted were properly imposed. The proceedings were consolidated for hearing and decision.
    FINDINGS OF FACT.
    The petitioners are all individuals residing at different places within the United States. Prior to March 1, 1913, they acquired stock of the Kington Coal Co. in the following amounts: Hammond L. Kington, 10 shares; W. W. Kington, 30 shares; O. M. Kington, 10 shares; Mrs. W. E. Davis, 10 shares; George M. Kington, 10 shares; E. W. Jones, Administrator, 10 shares; Mrs. J. Kies Trathen, 10 shares; Mrs. Omer J. Oates, 10 shares. The value of such stock at March 1,1913, was greater than cost.
    On January 15, 1920, the petitioner, W. W. Kington, purchased the stock interest of petitioners Hammond L. Kington, O. M. King-ton, and Mrs. Omer J. Oates, and paid each therefor, the amount of $35,000, or a total of $105,000. Some time in 1920, the Kington Coal Co. began the liquidation of its assets, and completed the same in 1922. Petitioners received liquidating dividends in each of the taxable years in the years and amounts below:

    At the date of liquidation there was outstanding assessment of Federal income and profits taxes against the Kington Coal Co. in the amount of $10,874.41. No part of such assessment was paid in 1920. When paid the Commissioner credited proportionate parts of such assessment to the petitioners, who received liquidating dividends in 1921 and 1922.

      The Kington Coal Co. was incorporated in 1907, with an authorized capital of $100,000, divided into 100 shares of the par value of $1,000 each. At the date of incorporation all the stock was issued to W. W. Kington in exchange for title in fee to 1,113 acres of coal land and for a lease of the coal in 319.8 acres. Subsequently, but prior to March 1, 1913, it acquired, without cost, a lease on the coal of 289 acres. The original coal content of this land was 5,000 tons of coal per acre, or a total of 8,609,000. The tonnage mined in 1909 was 90,130; in 1910, 183,618; in 1911, 206,044; in 1912, 241,120; and in 1913, 201,483. At January 1, 1913, the unmined coal content of the land was 7,888,088 tons. The fair value of the lands and leases here involved at March 1, 1913, was $175,000.
    The properties acquired by the Kington Coal Co. at the date of incorporation were wholly undeveloped. Prior to March 1, 1913, the company opened up two mines, built a railway track 4 miles in length, constructed 68 substantial 3-room tenement houses for mine workers, erected a tipple and other structures necessary to the operation of its mines, and installed mining and hoisting equipment. The cost of such development and construction work was not less than $120,277.47. The equipment was modern and up to date in every way, and consisted of engines, boilers, generators, electrical haulage, adequate hoistage facilities, and compressed-air mining machinery. At March 1, 1913, the mines of the company were producing coal at the rate of 1,000 to 1,500 tons daily. The net operating income of the company for the years 1910, 1911, 1912, and 1913, as disclosed in its tax returns for such years, was $17,039.01, $18,049.86, $19,613.60, and $26,575, or a total of $81,277.47. All previously earned operating net profits remained in surplus at March 1, 1913. On that date there was a bond issue outstanding in the amount of $55,000, and accounts and bills payable in the amount of $67,974.68. At the same date there were asset items other than land, plant and equipment, with a book value of $38,254.32.
    Upon audit of the income-tax returns of the several petitioners for the taxable years, the Commissioner found that the value of the stock of the Kington Coal Co. at March 1, 1913, was $1,724.54 per share, determined the deficiencies, and imposed the penalties here in controversy.
    The fair market value or price of the stock of the Kington Co. at March 1, 1913, was $190,000 or $1,900 per share.
   OPINION.

Lansdon:

In the light of all the evidence, and, giving due consideration to depreciation and depletion accrued prior thereto, we are of the opinion that the value of the property of the Kington Coal Co. at March 1, 1913, was $190,000, and that the fair market price or valúe of the shares in question at that date was $1,900 each.

At the date of the liquidation here involved there was an outstanding assessment of Federal income and profits taxes for the year 1918 against the Kington» Coal Co. in the amount of $10,874.41. It is agreed that no part of this assessment was paid in 1920. The petitioners aver that their respective liquidating dividends, received in 1920, should have been credited with prorated amounts of such assessment. The respondent has allowed such credits as deductions from income resulting from receipt of liquidating dividends received in 1921 and 1922. Petitioners introduced no evidence on this point and the determination of the respondent therefore is not disturbed.

Certain penalties for delinquency were imposed by the respondent. The petitioners introduced no evidence to show that such penalties were improperly added to the deficiencies in taxes. The imposition of a penalty of 25 per cent of the recomputed deficiencies of the petitioners who failed to make income-tax returns for the taxable years is approved.

In his brief, counsel for the petitioners argues that inasmuch as the Commissioner of Internal Revenue had determined the value of certain assets owned by the Kington Goal Co. at March 1, 1913, and, as such determination had become an element in the computation of tax liability for 1917, a successor of that Commissioner was without authority to determine any different value. The pleadings are silent on this point, and therefore, it is not in issue here.

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

Considered by GiíeeN and Aruxtdell.


text:
    Lawrence Trust Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10090.
    Promulgated October 25, 1927.
    The statutory period within which the amount of the petitioner’s income and profits taxes for the calendar year 1918 could be determined and assessed expired on June 15, 1924. Subsequently, both the petitioner and the respondent consented in writing to extend said period, and thereafter respondent determined the deficiency for said year within the period provided in said consent. Held that, notwithstanding the statute of limitations had run on the determination and assessment of the tax prior to the time the consent was executed, the tax might be determined and assessed within the period provided in said consent. Held, further, that no assessment of the tax having been made prior to the enactment of the Eevenue Act of 1924 and the period within which assessment might be made not then having expired, neither assessment nor collection of the tax is now barred by limitation.

      Cornelius J. Mahoney, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1918 and 1919 in the amounts of $10,662.55 and $998.65, respectively. With respect to the calendar year 1918, petitioner alleges that assessment of the deficiency is barred by the statute of limitations, and with respect to both the calendar years 1918 and 1919, petitioner alleges that the respondent erred by not allowing sufficient depreciation on fixtures and improvements. The respondent denies specifically and generally said allegations of the petitioner. By agreement of counsel, the hearing was limited to the issue raised by the plea of limitations in bar of the deficiency for the year 1918. In that connection, counsel for the petitioner stated that if said plea should be sustained, the petitioner was not disposed to contest the deficiency asserted for 1919, but that if said plea should be denied, it reserved the right to prosecute its appeal with respect to the deficiencies asserted for both years. Thereupon, counsel for the parties orally stipulated the material facts on the issue of limitations.
    FINDINGS OF FACT.
    The petitioner is a Massachusetts corporation, located at Lawrence. On March 19, 1919, the petitioner filed a tentative return for the calendar year 1918, and on June 16, 1919, duly filed its original income and profits-tax return for said year. An amended return was filed by the petitioner for said year on May 11, 1922. The statutory period within which the petitioner’s income and profits taxes for the calendar year 1918 might be determined and assessed expired on June 15, 1924, and thereafter under date of May 22, 1925, both the petitioner and the respondent executed a so-called waiver, or an instrument in writing, whereby said parties consented to extend the period prescribed by law for a determination, assessment and collection of the said taxes for said year. On October 21, 1925, and within the period provided in said waiver or consent, the respondent determined the deficiencies involved herein and mailed notice thereof to the petitioner, which was received in due course. The petitioner thereafter seasonably filed its appeal on December 13,1925.
   OPINION.

Trammell:

From the foregoing stipulated facts, it appears that at the time the waiver or consent was executed, the determination and assessment of the taxes in question were barred by the statute of limitations, and that the respondent thereafter determined the deficiency for the calendar year 1918 within the period provided in said waiver or consent. It further appears that no assessment of said taxes was made prior to the enactment of the Revenue Act of 1924, and that on the effective date of that act the period within which assessment might be made had not expired. Under similar facts, in Joy Floral Co. v. Commissioner, 7 B. T. A. 800, we held that, notwithstanding the statute had run on any assessment of the tax at the time the consent was executed, the tax might be assessed within the period provided in such consent. We also held further that where no assessment of the tax was made before the enactment of the Revenue Act of 1924, and the period within which assessment might be made had not then expired, the tax might be collected within six years after assessment. On authority of that decision, we hold that neither assessment nor collection of the taxes here involved is barred by limitations. Accordingly, the petitioner’s plea of limitations in bar of the deficiency asserted for the calendar year 1918 must be and is denied.

An order will he entered denying petitioner'’s plea of limitations im, hair of the deficiency asserted for the calendar year 1918, and this proceeding will he restored to the General Gcdendair for fu/rther hearing in due cowrse.

Considered by MoeRts, Murdock, and SiefkiN.


author: Teammell :

text:
    Commercial Electrical Supply Co., Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8827, 15973.
    Promulgated October 25, 1927.
    1. Additional compensation paid to employees in the form of bonuses held to be deductible as business expense for the year in which authorized and paid.
    2. Petitioner received the net sum of $4,370.37 in 1918 as compensation for loss of profits in prior years. On the facts, held that this amount represents taxable income for the year in which received.

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

      Bruce A Low, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies in income and profits taxes for the fiscal years ended January 31, 1919 (Docket No. 8827), and January 31, 1920 (Docket No. 15973), in the amounts of $8,798.01 and $9,067.63 respectively. On motion of petitioner, the proceedings were consolidated for hearing and decision. Petitioner assigns as error (1) the refusal of respondent to allow as deductions from income for the years involved certain amounts paid by petitioner to its employees as bonuses or additional compensation for services, and (2*) the action of respondent in adding to income for the fiscal year ended January 31, 1919, the sum of $4,370.37 alleged to have been received by petitioner in May, 1918, as damages in connection with the settlement of certain litigation.
    FINDINGS OP PACT.
    Petitioner is a Missouri corporation with its principal office at St. Louis, and is engaged in the wholesale electrical supply business. All of petitioner’s stock was owned originally by three brothers, Wm. H., Robert E., and Louis Nolker. The last named individual died prior to the taxable years on appeal, and during said years Wm. H. Nolker and Robert E. Nolker were the sole directors of the corporation. Petitioners had an average of approximately 75 employees engaged in clerical work and handling stock, to whom fixed salaries were paid, and to whom for certain years additional compensation was paid in the form of bonuses. The first year for which bonuses were paid was the fiscal year ended January 31, 1918. Beginning with 1917 there was an unusual demand for help and the employees of the petitioner made frequent requests for increases in salaries, which petitioner found it necessary to grant in order to keep them in its service. This situation was unsatisfactory, and petitioner decided to discontinue salary increases. Accordingly, in the fall of 1917, the employees were informed that there would be no more increases in salaries, but that a bonus would be paid to them at the end of the year.
    During each of the fiscal years ended January 31, 1919, and January 31,1920, the matter of the bonus to be paid to the employees was frequently discussed informally by the two Nolker brothers, but no formal action was taken by the board of directors with respect to the amount of the bonus to he paid for each year, prior to the close of that year. Formal action fixing the amount of the bonus was taken by the board of directors after the close of each fiscal year, as soon as the auditor had informed the directors of the approximate amount of profits disclosed by the books for the preceding year. Incidental to this procedure was the provision that the employees would receive the bonus allotted only if in the employ of petitioner at the times scheduled for payment. During each current year, the employees were informed that a bonus would be paid but they were given no information as to the amount thereof, other than that if the business was prosperous it would be a liberal amount.
    At a meeting of the board of directors of petitioner, held on March 13, 1918, the following action was taken, as recorded in the minutes:

      Upon motion the following increases in salary were ordered effective March 1st, 1918 as applying to monthly wage schedule and March 4th, 1918 as applying to weekly wage schedule. Honorariums, as noted, were duly approved and made payable to employees of record on the following dates: one-eighth of the total amount on the 16th and last days of the months of March, June, September and December, 1918.
    Then followed a schedule showing honorariums in the aggregate amount of $4,826.
    At a meeting of the directors held March 4, 1919, the following action was taken:
    Upon motion the directors unanimously approved of salaries and wages effective March 1, 1919 and declared honorariums payable to employees of record in equal installments (one-eighth of amount specified) on the 16th and last days of the months of March, June, September and December, 1919 as noted in the following schedule:
    The schedule set out showed honorariums in the total amount of $12,396.
    The following action was taken by the board of directors on March 10, 1920, as shown by the minutes of that date:
    The meeting was called to consider and act upon salary increases and honorariums. Upon motion unanimously carried salaries and wages were ordered as recorded in these minutes effective March 1st, 1920. Honorariums as shown in schedule were declared payable to employees of record in equal installments (one-eighth of amount specified) on the 15th and last days of the month of March, June, September and December 1920.
    The schedule set forth honorariums in the total amount of $21,990.
    Petitioner kept its books on the accrual basis. The books were not closed at the end of the fiscal year, but were kept open until the inventory had been taken and the approximate amount of profit ascertained. The amount of the bonus to be distributed among employees was then determined and accrued on the books as of January 31, the last day of the preceding fiscal year. Petitioner paid the bonuses in quarterly installments following the close of each fiscal year because of the fact that it operated largely on borrowed capital and would have found it inconvenient to pay each bonus in full at the time authorized. Of the amount of the bonus voted for the fiscal year ended January 31, 1919, the sum of $108 was not paid to the employees, and was thereafter reported by the petitioner as income in its tax return for the subsequent year. Also, the sum of $592.50 authorized as a part of the bonus to be paid to the employees for the fiscal year ended January 31, 1920, was not so paid and was reported by the petitioner as income in its tax return for the following year.
    During the years 1909 and 1910, petitioner purchased merchandise from the General Incandescent Lamp Co., of Cleveland, Ohio. At March 31, 1910, the account of the lamp company on the books of petitioner showed a credit balance of $9,118.16. Petitioner theretofore had also purchased merchandise from the United States Incandescent Lamp Co., of St. Louis. Both lamp companies were members of the Lamp Association, and because of some alleged disagreement between the lamp companies, the General Incandescent Lamp Co. thereafter refused to make further sales to petitioner. Petitioner thereupon refused to pay to said last named lamp company the balance of $9,118.16 due it, and asserted a counterclaim against the lamp company in excess of that amount on account of loss of business or profits. Petitioner’s counterclaim against the lamp company was based to some extent on defects in merchandise and other matters of minor importance, but was asserted principally because of alleged loss of profits. Litigation was finally instituted between the General Incandescent Lamp Co. and petitioner, which was terminated in May, 1918, under a compromise agreement by which the petitioner accepted as damages in settlement of its counterclaim 50 per cent of the amount shown on its books to be due to the lamp company, and the lamp company accepted a like amount in settlement of petitioner’s liability to it for merchandise. Pursuant to the compromise agreement, petitioner paid to the lamp company, through its attorney, on May 2, 1918, in final settlement, the sum of $4,559.08. Petitioner carried the credit balance of $9,118.16 in the account of the lamp company on its books from March 31, 1910, until May 2, 1918, on which last-mentioned date it charged against said balance the amount of $4,559.08, represented by its check issued in final settlement, thus leaving a credit balance of the same amount in said account. On May 13, 1918, petitioner charged against the lamp company account, the amount of $188.71 paid for court costs, leaving a balance of $4,370.37, which amount it transferred by appropriate entries to its profit and loss account, thus closing the lamp company’s account, and showing the net balance last mentioned as a credit to profit and loss. Thereafter, a debit item of $4,870.37 was entered in the profit and loss account as of January 31, 1919, and the surplus and undivided profits account was credited with a like amount, thus transferring the amount from profit and loss to surplus.
   OPINION.

Teammell :

The material facts in these proceedings are undisputed, and the pleadings raise only two issues for decision here, which will be considered in the order presented.

The first issue relates to deductions, under section 234 (a) (1) of the Revenue Act of 1918, of certain bonuses paid by the petitioner to its employees. Petitioner kept its books on the accrual basis, and subsequent to the close of each fiscal year involved, by formal action of the board of directors authorized the payment of a bonus to employees in quarterly installments during the following calendar year. The amount of each bonus thus authorized was accrued on petitioner’s books as of January 31, the last day of the preceding fiscal year, and claimed as a deduction for that year. The bonus authorized was payable only to employees of record at the several times scheduled for payment. The amount of each bonus accrued but not actually paid to its employees was thereafter reported by petitioner as income in its tax return for the subsequent year. Respondent disallowed the deduction claimed by the petitioner of the amount accrued on its books for the year of accrual, but allowed the amounts actually paid to the employees as deductions for the years in which they were authorized and paid. Petitioner contends that it is entitled to a deduction of the amount of each bonus accrued, for the year of accrual. Respondent contends that petitioner incurred no legal obligation to pay the bonuses in question in the respective years in which they were accrued on the books, and that the bonuses were not solely for services actually rendered during the year in which they were accrued.

The Revenue Act of 1918 provides in pertinent part as follows:

Se». 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.

It is undisputed that the amounts involved in these proceedings were paid or incurred as compensation for personal services.in carrying on a trade or business, and were reasonable. Were they incurred in the respective taxable years for which they were claimed as deductions by petitioner ?

The principles stated in Appeal of Van De Kamps Holland Dutch Bakers, 2 B. T. A. 1247, are applicable to the instant case. During the respective taxable years in question, no binding agreement was entered into between the petitioner and its employees for the payment of a bonus. The amount of the bonus was not determined nor any definite method fixed by which it could be computed. The only basis disclosed by the evidence to support even a moral obligation was the rather vague promise of the directors that if the business was prosperous the bonus would be a liberal amount. Furthermore, the amount of the bonus allotted to each employee for the preceding fiscal year was payable only in the event such employee remained in the service of petitioner until the several dates scheduled for payment during the succeeding year. Under these circumstances, the promise of the directors did not create an obligation legally enforceable against petitioner, and it could not accrue on its books for the preceding fiscal year a moral obligation of such an indefinite and contingent nature which would thereby justify a deduction of the accrued amount. We must hold, therefore, that petitioner is only en-titléd to deductions of the amounts of the bonuses actually paid to its employees for the respective years in which they were authorized by the board of directors. The bonuses were to be paid with a view to services in 1920 and as an inducement for the employees to remain with the company. The action of respondent in respect of the first issue is affirmed.

The second issue is predicated upon the action of the respondent in adding to petitioner’s income for the fiscal year ended January 31, 1919, the amount of $4,370.37 upon the ground that it had been received by the petitioner in that year as compensation for damages to its business on account of loss of profits. Petitioner purchased merchandise from the General Incandescent Lamp Co. from time to time during 1909 and 1910. At March 31, 1910, the account of the lamp company on petitioner’s books showed a credit balance of $9,118.16. The lamp company thereafter refused to make further sales to petitioner and petitioner refused to pay to the lamp company the balance due it for merchandise, at the same time asserting a counterclaim against the lamp company in excess of said balance. Litigation arose over the matter, which was finally adjusted in May, 1918, under a compromise agreement by which petitioner paid to the lamp company 50 per cent of its account, or the sum of $4,559.08, in full settlement, thus retaining an equal amount as damages for loss of profits. Petitioner paid court costs in the amount of $188.71, leaving a balance of $4,370.37 of which it received the benefit and advantage during the taxable year. Petitioner contends that when its counterclaim arose against the lamp company, the credit balance of $9,118.16 shown on the lamp company’s account, which theretofore had represented a liability, became in effect a reserve for a contingent liability, and that the amount of such reserve should be included in its invested capital. Also that the amount of $4,559.08 paid by it to the lamp company is deductible as a business expense.

An extended discussion of petitioner’s first contention seems to us unnecessary. Its liability to the lamp company was not changed into an asset by the mere assertion of the counterclaim. It very properly continued to carry the lamp company account on its books as a liability from March 31,1910, to May 2, 1918, when the final settlement ■was made. Nor was the lamp company’s account changed into the nature of a reserve for a contingent liability by the assertion of petitioner’s counterclaim. The petitioner did not set up on its books such a reserve. It follows that petitioner is not entitled to include the amount in question in the computation of invested capital.

The second contention of petitioner that the amount paid by it to the lamp company in 1918 represents a deductible business expense must likewise be denied. The net amount of $4,370.37 of which the petitioner received the benefit in the final settlement constituted income to it in the year in which received. William Henry Nolker, president of petitioner, testified at the hearing with reference to this matter as follows:

A. * * * Our counterclaim against the General Incandescent Lamp Go. for losses sustained, that is to say losses in business — our business in lamps dwindled by reason of this supertrust refusing to sell us goods.
Q. Just proceed and describe all of the negotiations.
A. Well, our attorney then took the matter in hand and, as I said before, our counterclaim was far in excess of the amount of money we owed them according to our books and eventually the thing was compromised and we accepted as damages 50 per cent of the amount shown on our books.
The Member. You mean you had a claim against them?
The Witness. Yes, we had a claim against them not only under the Sherman Anti-Trust Act, but also a claim for loss in business — a material claim — that is loss of profits.

The contentions of petitioner with respect to the second issue rest wholly upon the false premise that its counterclaim set up in 1910 wiped out its liability to the lamp company. The fallacy of such contentions is self-evident, since the lamp company declined to recognize the justness of the counterclaim and instituted litigation, which was not finally settled until May, 1918. At that time petitioner discharged its liability of $9,118.16 to the lamp company by the payment of $4,559.08. The difference between the amount paid and the liability discharged, less the expense item of $188.71, or the net amount of $4,370.37, represents the compensation received by petitioner for loss of profits. Accordingly, the action of respondent in adding this amount to petitioner’s income for the fiscal year ended January 31,1919, is approved.

Judgment will he entered for the resfondent.

Considered by Momas, Mukdock, and Siefkin.