author: Littleton :

text:
    Appeal of Herbert Jermain Slocum et al., Executors of the Will of Margaret Olivia Sage.
    Docket No. 5882.
    Promulgated February 3, 1927.
    Certain income received by the estate oí the decedent during administration and settlement was, pursuant to the terms of the will, permanently set aside for charitable, religious, and educational purposes and was a proper deduction in the return filed by the estate.

      Robert Thorne, Esq., and J. S. Y. Ivins, Esq., for the petitioners.

      E. G. Lalce, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income tax against the estate of Margaret Olivia Sage for the calendar year 1921 in the amount of $309,111.47. During 1921 the executors received certain income not in dispute from certain personal property in their hands constituting the residuary estate of the decedent, which property, under the will, they were directed to distribute to certain charitable, religious, and educational corporations. The Commissioner held that this income was taxable to the estate. The executors excluded it from income claiming that it belonged to the residuary legatees, all of whom were exempt from taxation.
    FINDINGS OF FACT.
    Herbert Jermain Slocum et al. were during the year 1921 the duly qualified and acting executors of the will of Margaret Olivia Sage.

      The .decedent left an estate of approximately $50,000,000. By her will she bequeathed specific sums aggregating $1,285,000 for charitable purposes, $8,618,079.55 for purposes other than charitable, and the residue of approximately $40,000,000 to thirty-five corporations organized and operated exclusively for charitable, éducational. and religious purposes, no part of the net earnings of which inured to the benefit of any private stockholder or individual.
    The executors’ account brought down to December 27, 1920, was settled by decree of the Surrogates’ Court of New York County dated April 25, 1921, and amended May 26, 1921. This account showed that all debts and general expenses of administration and 90 per cent of all general legacies had been paid prior to the date thereof, December 27, 1920. The remaining 10 per cent of all general legacies, with interest due thereon, was paid in May and June, 1921, pursuant to decree of the Surrogates’ Court. The entire balance of the estate remaining in the hands of the executors after the payment of the 10 per cent balance of general legacies and the entire net income for the year 1921, after payment of interest due on the general legacies, constituted the residuary estate passing under the will to the charitable, religious, and educational legatees.
    The will of the decedent provides, so far as material here, as follows:
    I give, devise and bequeath all the rest, residue and remainder of my estate, wheresoever and whatsoever, as follows:
    I divide my said residuary estate into fifty-two equal parts, and I give such parts as follows:
    * * * * * * *
    Should any of the religious, educational or charitable corporations named ás residuary legatees in my will be incapable for any reason of taking the whole or any part of the legacies given to them, I give, devise and bequeath the amount, which any such corporations would halve taken if capable of taking, to the other corporations entitled to share in my residuary estate, in the same proportion which the legacy given to each corporation capable of taking bears to the entire amount of legacies given to all such corporations.
    The books of the estate were kept upon the cash receipts and disbursements basis. No portion of the income of the estate for the year' 1921 was paid to any of the residuary legatees during the year. After the payment of all specific and general legacies in May and June, 1921, as above stated, there was no legatee, heir, or other beneficiary, except the residuary legatee, who was entitled to share in the remainder of the estate or in the net income involved in this proceeding.
    Early in 1922 the income received during the year 1921 on the residuary estate was credited upon the books to the various residuary legatees in proportion to their respective interests in the residuary estate under the will. The will created certain trusts and specified how the income from said trusts should be disposed of. That income is not involved in this proceeding. The will made no specific mention as to the income as such of the estate received prior to the distribution of all general and residuary legacies.
    The income upon the residuary estate for the year 1921 was deducted by the executors in the income-tax return of the estate as nontaxable under the provisions of section 219 of the Revenue Act of 1921. The Commissioner denied the deduction, included the amount in net income of the estate, and determined the deficiency here in controversy.
   OPINION.

Littleton :

We are dealing here with the question which concerns the propriety of a deduction from gross income by an entity admittedly subject to tax upon income received by it under certain circumstances. The facts are not in dispute. The parties differ only in their construction of certain provisions of section 219 of. the Eevenue Act of 1921.

The general purport and intent of section 219 as a whole and its relation to the development of the provisions of the various Revenue Acts from 1913 relating to the proper treatment of income of estates and trusts, has been discussed at length in oral arguments and by counsel for the executors in their brief, but we think it unnecessary to discuss the various phases of the situation as thus advanced as, in our opinion, under the facts as disclosed by the record, the basis for the decision of the question presented in this proceeding is to be found wholly within the provisions of section 21.9, subdivision (b) of the Revenue Act of 1921. We agree with the statement of counsel for the executors that it was the intent and purpose of the Congress in all of the Revenue Acts tó favor and encourage charitable bequests, and that it was the intention of Congress in the enactment of the Revenue Act of 1921 to exempt from taxation any income of an estate which is, during the taxable year, permanently set apart conformable to the provisions of a will to be used exclusively for charitable, religious, or educational purposes. This intention is demonstrated by the language of section 219 (b), in which it is provided—

* * * The net income of the estate or trust shall he computed in the same manner and on the same basis as provided in section 212, except that (in lieu of the deduction authorized by paragraph (11) of subdivision (a) of section 214) there shall also be allowed as a deduction, without limitation, any part of the gross income which, pursuant to the terms of the will * * * is during the taxable year paid or permanently set aside for the purposes and in the manner specified in paragraph (11) of subdivision (a) of section 214 * * *.

The Commissioner takes the position that although the income here in question was derived, from the residuary estate which, under the will, was to go to charitable, religious, or educational institutions, it was not a proper deduction because it was neither paid nor credited upon the books to them within the taxable year and points to the fact that the crediting entry upon the books was not made until early in 1922. Apparently, he would concede that the deduction was allowable if the income had been credited on the books to the various charitable, religious, and educational institutions during the year. He allowed as a deduction the income paid or credited to the general legatees during the year. We think that under the provisions of subdivision (b) of section 219 it was not necessary for the entry to be made upon the books crediting the income to these .residuary legatees in order for it to be allowable as a deduction by the estate in computing its net income, if it can be said that such income was permanently set aside for the residuary legatees pursuant to the terms of the will.

The estate made a return of the net income received during the year 1921 as required. All of the general legacies had been paid before the end of the year and that portion of the income of the estate applicable to such general legacies was paid to the general legatees and was deducted in the return and allowed by the Commissioner. The remainder of the income received to the date of the payment of the general legacies with interest, applicable to the residuary estate, which residuary estate under the terms of the will' the executors were specifically directed to distribute among the thirty-five religious, charitable, and educational institutions, and the income upon the residuary estate received during the remainder of the year which could not be paid, credited, or distributed to any legatee, heir, or other beneficiary other than the exempt residuary legatees, was claimed by the estate as a deduction under the provisions of subdivision (b) of section 219. This deduction was disallowed by the Commissioner and upon the amount thereof he computed the deficiency here in question. It was the duty of the executors, pursuant to the terms of the will, to pay to the residuary legatees or permanently set aside for them the income upon the residuary fund. This is what they did.

We think that Congress intended by subdivision (b) of section 219 that all or any portion of the gross income of an estate should be deductible when, conformable to and in pursuance of the provisions of the will, it was appropriated and dedicated finally and for all time to charitable and religious uses as specified in section 214 (a) (11), so that, thereafter, there woidd be no change which would destroy the character of such action. The executors were charged ■ by the will with the duty of apportioning the residuary estate among the charitable, religious, and educational institutions as specified in the will after the payment of all specific legacies, expense of administration, etc. Prior to the end of the year 1921 the executors had apportioned the fifty-two equal parts to the thirty-five residuary legatees as directed by the will. After the payment of the general legacies in May, 1921, there was little remaining to be done except to distribute the residuum among the residuary legatees. There were certain questions of the character of the instant 'proceeding relating to prior years still pending. We think it was the intent and purpose of Congress that income of an estate which, in following out the provision of a will, could be shown to be certainly destined for uses specified in paragraph (11)- of subdivision (a) of section 214 should be allowed as a deduction in computing the net income of the estate, and in view of the facts in this proceeding it is the opinion of the Board that the income upon the residuary estate was, agreeably to the terms of the will, permanently set aside for charitable, religious, and educational purposes and was a proper deduction from gross income within the meaning of subdivision (b) of section 219 of the Revenue Act of 1921.

In his answer the Commissioner stated, as a proposition of law in support of his action in disallowing the deduction to the estate, that “ Where a will of the testator makes a specific bequest to an exempt organization without designating that it shall be paid out of income, the payment by the estate of all of the bequest out of income does not permit the deduction of such payment in computing the taxable income of the estate,” and argues that the income upon the residuary estate should not be allowed as a deduction because the moment it was received by the executors it became a part of the residuary fund to be distributed as a part- of the estate and, since it was neither paid nor credited on the books to the residuary legatees, it did not belong to them and was not deductible until so paid or credited. The proposition of law does not seem to us to be applicable to the question involved, nor do we think that the Commissioner’s argument is in accordance with the provisions of the statute. Subdivision (b) of section 219 does not make the deduction depend upon the crediting or payment but upon the permanent setting aside of the income for charitable, religious, or educational purposes. The will directed that the residuary estate “ wheresoever and whatsoever ” be distributed to the exempt institutions. When the executors received the income it became a part of the residuary estate and was permanently set aside for and belonged to the exempt institutions. It was, therefore, a proper deduction by the estate.

This case is in some respects similar to the case of Stockton v. Lederer, 262 Fed. 173; Lederer v. Stockton, 266 Fed. 676, and 260 U. S. 3. That case, however, involved 1917 and prior years and arose under the provisions of the Eevenue Act of 1916, the provisions of which were somewhat different from the provisions of section 219 of the Eevenue Act of 1921, and the controlling fact seemed to have been that the hospital had possession of the residuary fund and was receiving the income. The Supreme Court stated (260 U. S. 8):

This residuary^ f und was vested in the Hospital. The death of the annuitant would completely end the trust. For this reason, the trustee was able safely to ráake the arrangement by which the Hospital has really received the benefit of' the income subject to the annuity. As the Hospital is admitted to be a corporation, whose income when received is exempted from taxation under § 11 (a), we see no reason why the exemption should not be given effect under the circumstances. To allow the technical formality of the trust, which does not prevent the Hospital from really enjoying the income, would be to defeat the beneficent purpose of Congress.

The question involved in this proceeding was decided by the District. Court for the Southern District of New York, Slocum v. Bowers, 15 Fed. (2d) 400, whieh held that the income upon the residuary estate was a proper deduction from gross income for the year 1919.. We agree with the conclusions reached by the learned court in that case but upon a slightly different ground.

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

.MillikeN concurs in the result only.


source: Caselaw Access Project

author: Tetjssell :

license: Public Domain

text:
    Charles F. L’Hommedieu & Sons Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5902.
    Promulgated February 3, 1927.
    Invested capitai,.' — The credit balances of officers’ and stockholders’ accounts for undrawn salaries, as appearing on the corporation books December 31, 1919, became paid-in capital on January 17, 1920, when the officers and stockholders formally . agreed to cancel their claims for such credit balances and to return the same to the corporation in payment for stock to be thereafter issued. Additions to such accounts during the year i 1920 were under the same agreement paid in to the corporation for stock on December 22, when stock was issued therefor.

      Charles F. Fuller, Esq., for the petitioner.

      L. G. Mitchell, Esq., for the respondent.
   Tetjssell :

In the audit of the petitioners income and profits-tax return for the year 1920 the Commissioner, on July 8, 1925, asserted a .deficiency'in the amount of $2,714.39, resulting from his elimination froin' investéd capital of the amount of $52,967.86, claimed by the petitioner on the basis of the facts hereinafter set forth.

FINDINGS OF FACT.

The petitioner is an Illinois corporation with its principal place of business at Chicago, and, since 1906, has been engaged as a manufacturer and dealer in platers’ supplies. All the stock of the corporation from the time of its organization until the present time has been owned by Charles F. L’Hommedieu and his three sons and one daughter. All of these members of the family, except one of the sons who held one share only, were continuously and actively employed in the conduct of the corporation’s business and were all, on the regular pay roll as officers and employees. The officers, directors, and stockholders of the corporation, being all the same persons and all regularly present at its place of business, it had always been the custom for these persons to discuss the business affairs of the corporation; make decisions pertaining to business matters; and to carry out such determinations in the conduct of the company’s business without making any written record thereof. The company ordinarily kept no minutes of directors’ meetings, and minutes of the annual meeting of stockholders were of the most informal character. For some years prior to 1920 it had been the practice of the corporation from time to time to make oral agreements for the payment of salaries to its officers and stockholders, and during all of those years the agreed amounts of these salaries were regularly credited to each person entitled thereto on an open account in the books of the corporation. From these open accounts these officers and stockholders drew such sums from time to time as suited their necessities or convenience. Balances carried in these accounts were treated as debts due to such stockholders and officers, and interest was annually paid thereon at C per cent per annum up to the close of the calendar year 1919.

On December 31, 1919, the total of the balances in these accounts was $40,673.23. On the same date balancp sheets showed capital stock issued $30,000, surplus and undivided profits $53,216.79. On that date all the resources of the company were absorbed in land, buildings, machinery and equipment, inventories and accounts receivable, except $2,685.70 in cash and°$3,750 in Liberty bonds. The business of the company had grown from a very modest beginning in the year 1906 until at the end of the year 1919 its total resources aggregated $187,416.88.

During the year 1919 the management of the company became convinced that its plant and equipment were insufficient to accommodate the needs of its growing business. In October, 1919, its managers consulted its bankers concerning the matter of procuring a loan of $20,000 or $30,000 for the purpose of constructing additions to its buildings and installing additional equipment. The bankers advised the company’s officers that with the large amount of the company’s indebtedness to its stockholders standing as an obligation the bank woidd not bo willing to make the loan desired. Thereupon, the stockholders conferred among themselves as to the steps which could be taken to get the necessary credit, and, at the date of the annual meeting on January 17, 1920, all of these stockholders reached the final agreement that they would, and they then did, enter into an understanding and agreement that the amounts standing to the credit of each stockholder on account of undrawn salaries as of December 31, 1919, should be then and there paid back to the company, and that each.stockholder should thereafter receive, for the amount of his or her respective balance, additional stock representing such balance at such future date as new stock could be issued. They also at the same time agreed that any portions of the 1920 salaries which -were undrawn at the time of the issue of such additional stock should be then paid back to the company for additional shares then to be issued. Thereafter, the management of the company assured its bankers that such action had been taken; that the stockholders’ credits had been canceled and the amounts thereof paid back to the corporation. On April 3, 1920, the bank made the company a loan of $30,000 to be used for additional buildings and equipment.

On or about October 9, 1920, the corporation made application to the officials of the State of Illinois for authority to increase its capital stock from $30,000 to $150,000. In due course of time such authority was granted, and on December 22, 1920, at a special meeting of the stockholders and officers of the company, it was agreed, and the agreement was then and there carried out, that the company then issue to the stockholders of record as of January 1, 1920, a stock dividend of 176 per cent, aggregating $52,800, and that it also issue to the stockholders and officers whose credit balances had been paid back by virtue of the agreement of January 17, 1920, stock of a par value of $57,200, making a total aggregate stock issue on that date of $110,000. It was then further agreed that such balance as after the issue of this stock remained in the so-called salary credit accounts should be retained as a part of the company’s surplus until by future additions such balance should reach the figure of $10,000, when stock should be issued to the parties whose accounts showed such balances and in the total amount of $10,000. This last-mentioned stock was issued sometime during the year 1921.

On December 22, 1920, the salaried officers and stockholders had left undrawn 1920 salaries in an aggregate amount of $23,309.18, $16,526.67 of which was absorbed in the stock issued on that date. Six thousand seven hundred and eighty-two dollars and forty-one cents remained in an account of cash paid in for stock for which tile . shares were not then issued.

The amount of $40,673.23, the aggregate of the stockholders’ credit balances as of December 31, 1919, became paid-in capital on January 17, 1920. The amount of $23,309.18 of authorized salaries for 1920, but not then withdrawn, became paid-in capital on the 22nd day of December, 1920.

The deficiency may he redetermined in accordance with the foregoing findings of fact pursuant to Rule 50, and judgment will he entered in due course.


author: Teussell :

text:
    Appeal of Falketind Ship Co.
    Docket No. 3706.
    Promulgated February 3, 1927.
    Accounting for round-trip voyages. — The accrual method of accounting, as applied by this petitioner to round-trip voyages of a sailing vessel, held clearly to reflect the income as required by section 212 (b) of the Revenue Act of 1918.

      Irving H. Franh for the petitioner.

      Ellis W. Manning, Esq., for the Commissioner.
    On February 27,1925, the Commissioner caused to be forwarded to the petitioner a deficiency letter disclosing the results of an audit of petitioner’s income and profits-tax returns for the calendar years 1918 and 1919, and asserting a deficiency for the year 1918 in the amount of $40,881.04, indicating an overassessment for the year 1919 in the amount of $8,931.95.
    FINDINGS OF FACT.
    The petitioner is a California corporation organized pursuant to certain war legislation of the United States and certain regulations of the United States Shipping Board, and for the purpose of taking-title to and operating the sailing schooner Fdlhetind. The principal office of said corporation is in San Francisco.
    The company is what is known in shipping parlance as a single ship company, that is, it owned and operated one vessel. During the calendar years 1918 and 1919, San Francisco was the home port of the schooner Fallcetind. The petitioner began the operation of the schooner in the year 1917, during which year the ship made a voyage from San Francisco to Manila. During the first half of the year 1918 the ship made the return voyage from Manila to San Francisco.
    On February 25, 1918, the petitioner executed a charter party with F. Griffin & Co., chartering the schooner for a voyage from San Francisco to-Melbourne and Sydney, New South Wales, for the lump sum of $110,000 net, payable in San Francisco upon the signing of outward bills of lading at San Francisco, whole prepaid freight to be considered earned, vessel lost or not lost.
    On May 8, 1918, the Anglo-Norwegian Shipping Co.', Inc., agents for the Falketind Ship Co., entered into a charter party with the Food Administration Grain Corporation of Australia,, chartering the Falketind for the delivery of a cargo of wheat from Sydney, and other near-by ports, to San Francisco Bay. Payment of the freight in this case was to be made, less advances, upon unloading and right delivery of the cargo. Following the completion, in 1918, of the return voyage from Manila, the schooner was put in condition, loaded, and furnished with supplies, stores and crew for its proposed voyage to Melbourne and Sydney. The conditioning and furnishing of stores and supplies for this voyage cost the petitioner $16,508.96. The contracts with the captain and members of the crew provided for the payment of their compensation for the complete round voyage from San Francisco to Sydney and return to San Francisco after the full round voyage had been completed.
    The voyage to Melbourne and Sydney was started on July 25, 1918, and at or about that time the • charterer,. F. Griffin & Co., paid to the petitioner advanced freight charges in the amount of $103,752. • The' vessel arrived at the port of Sydney on October 13, 1918, where she thereafter discharged her cargo. At Sydney the master of the"vessel paid out, in connection with the discharge of the outgoing cargo, $9,328.78. Fie also paid, in connection with the return. cargo, $9,244.61.
    At Sydney the master of the vessel took on a deck cargo in addition to the regular cargo contracted for by the Australian Food Administration Grain Corporation, and ,for the carriage of this deck cargo, received, and later accounted for, the sum of $514.57. The vessel commenced its return voyage froip Sydney to San Francisco on December 20, 1918.
    The vessel arrived at its home port in San Francisco on April 1, 1919, and completed the discharge of her cargo on or about May 1, 1919, at which time the petitioner received the additional amount of $63,097.87, freight móney paid for the regular cargo carried on the return voyage. ' '•
    Prior to the’completion of the round voyage from San Francisco aiid return the petitioner had made entries úpon its books respecting the advanced receipts of freight money and disbursements applicable to such round voyage substantially as follows:
    Receipts, IT. Griffin & Co_$103,752‘. 00
    Cowlishaw Bros., Sydney- 514.57
    - $104, 266.57
    Disbursements for outward voyage- 16, 508.96
    For outward voyage at Sydney- 9, 328. 78
    For return voyage at Sydney_ 9,244. 61
    - 35, 082.35
    Credit balance_ 69,184.22
    In its balance sheet as of December 31, 1918, it carried the said credit as a liability as follows:
    Voyage #2 — uncompleted_$69,184.22
    Of the disbursements above set forth, the items disbursed at the Port of Sydney were not known at the petitioner’s office until some time during the early months of 1919. Under all the charters herein referred to the petitioner operated the vessel, supplying her master, officers, and crew; paying their wages; supplying and paying for her stores; making repairs and paying therefor; paying for stevedoring, pilotage, clerkage, port dues, dockage, surveys, dunnage, towage, agency fees, insurance, and other like charges.
    In the year 1918, and prior to the beginning of the voyage to Sydney, the Falhetind had completed the return voyage from the Philippine Islands. In the petitioner’s income and profits-tax return for the year. 1918 it showed gross income in the amount of $96,610.71, and deductions aggregating $92,026.69, net income $4,582.02. These figures all pertain to the completed Philippine Islands voyage.
    In its income and profits-tax return for the year 1919 the petitioner showed—
    Gross income_$167, 442. 87
    Deductions aggregating_ 108, 659.41
    Net income_ 58, 783.46
    All of these figures of income and deductions are the result of the round-trip voyage from San Francisco to Sydney and return, which voyage began in the year 1918 and ended in the year 1919. In its balance sheet as of December 31, 1919, the petitioner carried a liability item as follows:
    Voyage #3 — out_$77, 533. 97
    During the years here under consideration the petitioner kept its books of account according to approved accrual methods as applied to a round-trip voyage of the ship it operated, and it closed its books annually on December 31, on the basis of the round-trip voyages completed during each calendar year.
   OPINION.

Teussell :

The record of this case contains the testimony of several wi( nesses, some of whom are officers of corporations engaged in operating what are known as single ship companies; others are accountants who have had experience in keeping and auditing accounts of such companies. All of these witnesses testified that in the case of the so-called single ship companies it is, and for years past has been, a general practice to keep the accounts of such companies on the accrual basis as applied to completed round-trip voyages and to close the books for each year on the basis of the round voyages completed in each year. And, we are convinced that that method of accounting as employed by this petitioner can be properly said clearly to reflect its income under provisions of section 212 (b) of the Revenue Act of 1918.

■ On the other hand, when the Commissioner made up his assertion of a deficiency for the year 1918 he had before him the fact that the round-trip voyage from San Francisco to Sydney and return had consumed not less than 250 days, of which 160 fell in the year 1918 and 90 in the year 1919. He also had before him the fact that the total deductions for the round trip aggregated $108,659.41, and yet he proposed to allow for the year 1918 of such total deductions only the sum of $35,082.35, which indicates a clear distortion of net income for that year. We are, therefore, of the opinion that the petitioner’s books of account and its income and profits-tax returns made upon the basis of such accounts, must be said clearly to reflect its income and should not be disturbed.

The deficiencies may be redetermined in accordance with the foregoing fundings of fact and opinion pursuant to Bule 50, and judgment will be entered in due course.


author: Murdock:

text:
    W. E. Caldwell Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1834.
    Promulgated February 3, 1927.
    A cask dividend declared on February 1, 1918, payable on April 1, 1918, creates a debt due -from the corporation to tlie stockholders immediately from the date of declaration, and under section 201 (e) of the Revenue Act of 1918,- the distribution must be deemed to have come out of prior years’ earnings, having been made during the first sixty days of the taxable year. Invested capital should be reduced by the amount of the dividend as of the date of declaration, in accordance with section 326(d) of the same Act, without being affected by any earnings of the taxable year available for dividend purposes.

      J. Robert'Sherrod, Esq., and Ward Loveless, Esq., for the petitioner.

      T. M. Willems, Esq., for the respondent.
    The Commissioner determined a deficiency in income and excess-profits taxes for the calendar year 1918, in the amount of $9,802.60. The original petition alleged that the petitioner was entitled to special assessment. An answer was filed and a hearing was held at which some testimony was taken. The case was then placed on the reserve calendár to await the decision of the Court of Appeals of the District of Columbia, in the case of David, H. Blair, Gommis-sioner of Internal Revenue, Appellant, v. Oesterlein Machine Go. Before that decision was announced, the petitioner, with the permission of the Board, amended its petition, abandoning its plea for special assessment and alleging error on the part of the Commissioner in computing its invested capital. Only $2,174.19 of the alleged deficiency is in controversy. Most of the facts pertinent to the issue here were stipulated.
    FINDINGS OF FACT/
    The petitioner, a Kentucky corporation, had its principal office in the City of Louisville, and was engaged in the manufacture of wood and metal water towers and tanks. On February 1, 1918, at a regular meeting of its directors, a dividend of $80,000 was declared. The minutes of the corporation in regard to the dividend are as follows:
    * * * Upon motion of H. B. Wintersmith and seconded by W. B. Caldwell, that a dividend of 40 per cent be paid in cash out of the surplus and earnings for the year 1917, * * * at the office of the company. * * *
    Checks in payment of the dividend were sent out on April 4, 1918. The Commissioner determined the invested capital for the year 1918 to be $460,786.97 and net income to be $129,666.96, but prorated the dividend of $80,000 as being removed from invested capital for 306 days of the year 1918, namely, from March, 1, 1918, to the end of the year, resulting in a reduction of invested capital in the amount of $67,068.49: He later admitted, however, that he should have used April 1, 1918, instead of March 1, 1918.
    The 1918 earnings available for dividend purposes ón April 1, 1918, before deduction of a “ tentative tax,” amounted to $31,972.68, and after the deduction of a “ tentative tax ” amounted to $14,788.80.
   OPINION.

Murdock:

The Commissioner admitted that he erroneously reduced invested capital by prorating $80,000 as being removed from March 1, 1918, to the end of the year, and now contends that the prorating should be from April 1, 1918, to the end of the year. He apparently concedes that the 1918 earnings available for dividend purposes on April 1 should be reduced by the proportionate part of a “ tentative tax,” which he has determined, and should be then deducted from $80,000, and the. remainder prorated as being removed from invested capital from April 1, 1918, to the end of the year. Thfe petitioner agrees with him in this, except that he contends that the 1918 earnings available for dividend purposes on April 1, 1918, should not be reduced by the amount of a tentative tax. To this end the parties have stipulated what the deficiency should be in each case. We can not follow their stipulation in,this regard, because it is apparent that invested capital, and hence the deficiency, is to be determined in quite a different way, and that the case does not hinge upon our decision of the “ tentative tax ” question.

In the Appeal of A. H. Stange, 1 B. T. A. 810, we had occasion to consider the meaning of the words “any distribution made,” as they appeared in section 31 of the Revenue Act of 1916 (added by section 1211 of the Revenue Act of 1917), relating to dividends, which is as follows:

Sec. 31. (a) That the term “ dividends ” as used in this title shall be held to mean any,distribution made or ordered to be made by a corporation * * * out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders * * *.
(b) Any distribution made to the shareholders or members of a corporation, * * * in the year nineteen hundred and seventeen, or subsequent tax years, shall be deemed to have been made from the most recently accumulated undivided profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received, and shall be taxed to the distributee at the rates prescribed bylaw for the years in which such profits or surplus were accumulated by the corporation, * * * hut nothing herein shall be construed as taxing any earnings or profits accrued prior to March first, nineteen hundred and thirteen, but such earnings or profits may be distributed * * * exempt from the tax, after the distribution of earnings and profits accrued since March first, nineteen hundred and thirteen,, has been made. This subdivision shall not apply to any distribution made prior to August sixth, nineteen hundred and seventeen, out of earnings or profits accrued prior to March first, nineteen hundred and thirteen.

Likewise, in the Appeal of Harmon W. Hendricks, 4 B. T. A. 1257, we considered the. same words in the same connection and discussed the effect which .the case of Edwards v. Douglas, 269 U. S. 204, had -upon our previous interpretation of these words. In each instance- we, held that the words “any distribution made” had reference to the declaration of a dividend, rather than to the actual time of payment of a dividend. See also Appeals of Elizabeth W. Stranahan, 4 B. T. A. 1141; Mary A. Fitzgerald,, 5 B. T. A. 178; and Maurice J. Curran, 5 B. T. A. 180.

The same words appear in section 201(e) of the' Revenue Act of 1918, which is as follows:

Any distribution made during tbe first sixty days oí any taxable year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; but any distribution made during tbe remainder of the taxable year shall be deemed to have been made from earnings or profits accumulated between the close of the preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the boohs of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably during such period.

The respondent in his brief assumes that we have the same situation before us in this case that we had in the above cases and therefore cites the case of Routzahn v. Mason, 13 Fed. (2d) 702, decided by the Circuit Court of Appeals for the Sixth Circuit. Louisville, the place of business of this petitioner, is in that circuit. The corporate dividends which came to Mason and formed the basis of his tax were declared near the end of 1916, and were made payable and were paid at various dates in 1917, from February until July. They were returned by Mason as a part of his 1917 income, and the question was whether the 1916 or 1917 taxing rates should be applied. The court below concluded that the “ distribution ” was made when the dividend was declared, segregated from the body of undivided profits, and became a debt from the company to the stockholder, which he could sell independently of the stock.

The court in a per curiam decision said, in reversing the lower court:

That, as between the stockholder and the corporation and from many points of view, such a declaration is a distribution of profits, is indisputable; but this is a taxing statute, the dominant thought of which is that the citizen should suffer an annual burden upon his annual current income. “Distribution ” must mean a disposition which at that moment results in income, because to ascertain taxable income is the purpose and subject-matter of the act, and a dividend declared this year, payable in the next or some more distant year, is not within the normal conception of income for this year,

The case of Routzahn v. Mason, supra, and the decisions of this Board, above cited, considered the meaning of the same words, the meaning of which we are now considering, but from an entirely different angle! Our question has to do with the statutory invested capital of the petitioner and has nothing to do with the time at which the distribution results in income to the distributee, or the rates at which it is taxable to him.

The opinion in Routzahn v. Mason concedes that from many points of view the declaration of a dividend is a distribution of-profits. It holds that since the purpose of the statute is to ascertain taxable income, a dividend declared is not taxable income to the distributee until he receives it. To so decide it was not necessary for the court to hold, and we do not think that it intended to hold, that the words “ any distribution made,” as they affect invested capital, do not mean the declaration of a dividend.

The reasoning advanced in the Stonge case was to the effect that upon the declaration of a dividend the corporation immediately becomes the debtor of the stockholder for his proportionate part of the dividend, regardless of the fact that actual payment is not to be made until later. There is abundant authority for this proposition and we have seen no authority to the contrary. Attentiqn is called to the cases quoted and cited in the Appeal of A. H. Stange, supra.

In the case of Wheeler v. Northwestern Sleigh Co., 39 Fed. 347, (Circuit Court, E. D. Wisconsin, 1889) the court said:

By the declaration of a dividend, however, the earnings, to the extent declared, are separated from the general mass of property, and appropriated to the then stockholders, who become creditors of the corporation for the amount of the dividend. The relationship of the stockholder to the corporation, as to the amount of the dividend, is thus changed from one of partnership ownership to that of creditor. He thereafter stands * * * with respect to the dividend, as a creditor upon a par with other creditors of the corporation. ■ * * * That the dividend is payable at a future date can work no distinction in the right. The debt exists from the time of the declaration of dividend, although payment is postponed for the convenience of the company.

And in Jermain v. Railroad Co., 91 N. Y. 483, the court said:

When a dividend has once been declared out of net earnings, the amount of such dividend is no longer a part of the assets of the company, but is appropriated or set apart for the shareholders.

This case was cited in People ex rel. United States Trust Co. v. Barker, 86 Hun, 131; 33 N. Y. S. 388, which held that the amount of a dividend such as we are here considering constituted no part of surplus profits or reserve fund from the date of declaration.

Billingham v. E. P. Gleason Mfg. Co., 101 App. Div. 476; 91 N. Y. S. 1046, stated:

■ * * .* For nothing is better understood than that a dividend, when declared, is a debt due absolutely to the stockholders. It was an obligation perfect and complete in its character, • although payment was postponed to a future time. It was debitum in praesenti, solvendum in futuro. (Affd. 185 N. Y. 571; 78 N. E. 1099.)

Staats v. Biograph Co., 236 Fed. 454 (C. C. A., Second Circuit), in: an opinion by Rogers, C. J., citing and quoting from Taylor on Corporations, 5th ed., sec. 568; Machen on Modern Law of Corporations, vol. 2, sec. 1358; Morawetz on Corporations, vol. 1, sec. 445, held :

But if a board of directors should declare a cash dividend and mate a public announcement of the fact, the courts have held that thereafter the board has no right to reconsider and rescind its action. The reason seems to be that the declaration of the dividend sets apart from the profits of the corporation a sum which is to be paid to the stockholders in proportion to their shares, and that it creates a debt due from the corporation to each shareholder, resulting in the relation of debtor and creditor. The dividend divides the property which belongs to the corporation into that which the corporation retains and that which the corporation agrees to pay to the stockholders, and which it is thereby bound to pay. That which one person is bound to pay to another is a debt. Lockhart v. Van Alstyne, 31 Mich. 76, 78, 18 Am. Rep. 156 (1875).

In Park v. Gilligan, 293 Fed. 129, District Court, So. Dist. of Ohio, it was said that:

It is well settled that the declaration of a dividend creates a debt from the corporation to the stocknolders.

See also Ford v. Snook, 205 App. Div. 194; 199 N. Y. S. 630, wherein other authorities are cited; Nutter v. Andrews, (Mass.) 142 N. E. 67, citing Massachusetts, New York and Kentucky cases in support; Petty v. Hagan, 205 Ky. 264; 265 S. W. 787; Segerstrom v. Holland Piano Mfg. Co., 160 Minn. 95; 199 N. W. 897; Benas v. Title Guaranty Trust Co., 216 Mo. App. 53, 267 S. W. 28; Thomas v. Laconia Car Co., 251 Mass. 529; 146 N. E. 775; Appeal of Watsontown Brick Co., 3 B. T. A. 85; and Fletcher’s Cyclopedia of Corporations, sec. 3653 in vol. 6, and the same section in vol. 11, 1924 Supplement, wherein numerous authorities are cited.

If such a relationship is created upon the declaration of a dividend, from that moment the corporation has no right to have the amount of the dividend included in its statutory invested capital, as defined by section 326 of the Revenue Act of 1918. If it uses the money or property with which it must pay the dividend, to the amount of the dividend declared it is using borrowed money and such is excluded from statutory invested capital. In the above Act, see sections 325(a), where the term “borrowed capital ” is defined, and 326(b), which eliminates borrowed capital from invested capital; and also see the Appeal of Wm. H. Davidow Sons Co., 1 B. T. A. 1215. The distribution, so far as invested capital is concerned, takes place at the date of declaration of the dividend.

In the present case, under section 201(e) of the Revenue Act of 1918, the distribution must be deemed to have come out of prior years’ earnings, having been made during the first sixty days of the taxable year, and $80,000 should be removed from invested capital from February 1, 1918, to the end of that year, in accordance with section 826(d), without being affected by any earnings of that year available for dividend purposes.

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


author: Smith :

text:
    Luthe Hardware Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 708.
    Promulgated February 3, 1927.
    On December 20, 1917, tbe petitioner declared a cask dividend of 200 per- cent payable by or before December 27, 1917, from the company’s earnings of 1916, 1915, 1914, 1918. The dividend was immediately paid in cash to one of the stockholders and was credited to the two principal stockholders. In March, 1918, the petitioner received authority to increase its capital stock and the credits to the two principal stockholders were canceled and additional shares of stock issued to such -stockholders on March 9, 1918. Held, that the dividend declared as a . cash dividend on December 20, 1917, wás not a stock dividend and that the petitioner was not entitled to include in invested capital from January 1 to March 9, 1918, the amount of cash dividend used by the stockholders entitled thereto for the purpose of acquiring additional shares of capital stock.

      O. B. Stiver, Esq., and A. 8. Schaetzle, Esq., for the petitioner.

      G. II. Curl, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits tax for the year 1918 in the amount of $4,685.64. The points in issue are (1) whether a dividend declared by the petitioner on December 20, 191?, was a cash dividend or a stock dividend, and (2) if a cash dividend, whether the petitioner is entitled to include in invested capital the amount of the dividend declared which was utilized by the stockholders entitled thereto in acquiring additional shares of stock issued on March 9, 1918.
    findings of fact.
    Petitioner is an Iqwa corporation with its -principal place of business in the.'City of Des Moines. It is engaged in the wholesale hard,wai$ business, Prior to January 1, 1918, it was a close corporation, with an issued and outstanding capital stock of $150,000, which, w&s represented by 300 shares of stock, each share having a pay value qf $500.. -Of this, amount, F. H. Lyithe held 142 '.shares, C. J, Rutlie 142 shares, Emma Luthe 6 shares, and A. J. 'Cook 10 shares.- The first three- jiamed stockholders were brothers and sister.

      The business of the petitioner had been very profitable and F. H. Luthe and C. J. Luthe determined ultimately to relinquish their interests in the corporation to certain faithful employees. This was discussed during the year 1917 and certain of the employees were advised of what was running in the minds of the two Luthe brothers. In years prior to 1917 it had been the practice of the corporation to declare a dividend once a year, usually during the first three months of the year. On December 20, 1917, a special meeting of the stockholders of the corporation was held for the purpose of declaring a dividend and the minutes of the corporation show “ upon motion a cash dividend of 200 per cent was declared payable by or before December 27, 1917, from the company’s earnings of 1916, 1915, 1914, 1913.”
    Checks were drawn for the amounts of the dividend payable to Emma Luthe and A. J. Cook and the check payable to the former was cashed. The check payable to A. J. Cook was held at his instance by an officer of the corporation until such time as additional shares of stock should be issued and the check was ultimately endorsed by Cook and utilized in purchasing additional shares of stock when such additional shares of stock were available for issuance. The amounts of the dividend payable to F. H. Luthe and C. J. Luthe were placed to their credit upon the corporation’s books of account and in the balance sheet as of December 31, 1917, were shown as accounts payable. The balance sheet as of that date shows as follows:

    In the early part of March, 1918, the petitioner sought authority from the Executive Council of Iowa to increase its capital stock from $150,000 to $600,000, and to change the par value of each share from $500 to $100, and also for authority to issue one-half of the total capital stock as common stock and the other half as 6 per cent cumulative preferred stock. Upon the verbal assurance that the authority would be granted, the petitioner on March 9, 1918, distributed to F. H.- Luthe and to C. J. Luthe all inadmissible assets held by the corporation which consisted of municipal bonds in the amount of $123,092.06 acquired prior to 1918 and $9,4525 acquired February 24, 1918, plus accrued interest on the same in the sum of $2,330.81, making a total amount distributed to these two stockholders on that date of $135,047.87. On the same date about fifty written contracts were entered into with employees of petitioner corporation by F. H. Luthe and C. J. Luthe and the corporation for the purchase by the employees of additional shares of stock. The corporation joined in this contract for the purpose of giving it the right to repurchase the stock of any employee who should sever his connection with the company.
    On March 13, 1918, there was also distributed to F. H. Luthe and C. J. Luthe the sum of $41,086.11 in completion of the transactions whereby the corporation reached the capitalization of $600,000.
    On March 12,1918, written application was made to the Executive Council of Iowa for authority to issue additional capital stock in the sum of $450,000. The authority was granted under date of March 28,1918, in specific words as follows:
    * * * To issue additional stock in the sum of $450,000 in exchange for merchandise valued at $386,487.72, accounts receivable in the sum of $154,-435.58, furniture and fixtures valued at $6,000, supplies valued at $2,000, and cash in the amount of $55,802.24, as listed, described and referred to in the application and appraisements of said company on file with the Executive Council.
    In its profits-tax return for the year 1918, the petitioner included in invested capital the amounts placed to the credit of F. H. Luthe and C. J. Luthe as a result of the cash dividend declared on December 20, 1917, from January 1 to March 9, 1917. The Commissioner has reduced ihe invested capital of the corporation in the amount of the cash dividend thus declared and credited to the principal stockholders.
   OPINION.

Smith :

The petitioner complains that the Commissioner has erroneously excluded from its invested capital for the calendar year 1918 the amount of a dividend declared on December 20, 1917, and placed to the credit of the principal stockholders’ accounts as of that date. The petitioner contends that the dividend was in effect a stock dividend.

From the evidence of record it is to be noted that the corporation, on December 20, 1917, declared a cash dividend. It so designates the dividend declared and the dividend was paid in cash to the two minority stockholders and the check drawn in payment of the dividend to one of the minority stockholders was immediately cashed. It is the contention of the petitioner that the corporation was in error in using the word “cash” in referring to this dividend; that it was never the intention of the petitioner to declare a cash dividend; that at the time the dividend was declared it was the contemplation of the two Luthe brothers that the capital stock of the corporation would, be increased and that they should receive shares of stock in place of cash for the dividend payable to them.

Whether a dividend declared is a cash dividend or a stock dividend is a question of fact to be determined from all the circumstances in the case. The courts will look to substance and not form in determining the issue. United States v. Mellon, 279 Fed. 910; (C. C. A.) 281 Fed. 645; United States v. Davison, 1 Fed. (2d) 465; Appeal of Theresa Zellerbach, 2 B. T. A. 1076.

The facts which obtain in this .case are substantially different from those which obtained in the cases above referred -to. The evi-_. dence is by no means convincing that it was the intention of the two Luthe brothers that the cash dividend declared on December 20, 1917, should not be paid to them in cash. The corporation had undivided profits greatly in excess of the amount of the dividend-declared and the amount of cash and liquid investments was in excess of $300,000. The corporation had no authority at the time the dividend was declared to increase its outstanding capital stock. In our opinion, the case at bar is similar to cases hereinbefore decided by the Board to the effect that a dividend paid was a cash dividend and not a stock dividend. Appeals of A. H. Stange, 1 B. T. A. 810; Wm. H. Davidow Sons Co., 1 B. T. A. 1215; Eugene E. Paul, 2 B. T. A. 150; W. J. Hunt, 5 B. T. A. 356.

The second point for decision is whether the dividend declared on December 20, 1917, should be considered as reducing the surplus and therefore the invested capital from the date of declaration. The law is well established that as soon as the dividend is lawfully and fully declared out of surplus profits the corporation becomes indebted from that moment to each stockholder for the amount of his share. W. E. Caldwell Co. v. Commissioner, 6 B. T. A. 47. The amount so declared, therefore, represents borrowed capital and as such can not be included in invested capital.

Judgment will be entered for the Commissioner.


author: Littleton:

text:
    B. R. Norvell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. B. R. Norvell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7720, 7719.
    Promulgated February 4, 1927.
    A $20,000 dividend of The American National Bank of Beaumont, Texas, in 1920 was a stock dividend and did not constitute taxable income to the petitioners.

      Evert L. Bono, Esq., and Rampson Cary, Esq., for the petitioners-.

      Wm. R. Lawder, Esq., for the respondent.

      The Commissioner determined a deficiency in income tax of $1,040.60 against each of the petitioners for the calendar year 1920 as a! result of his holding that a dividend of $20,000 declared by The'American National' Bank of Behumont,1 Texas, was a cash dividend and constituted taxable income. ■ The petitioners claim that this ■ was a stock'dividend. These proceedings were consolidated for hearing and decision.
    FINDINGS OF FACT.
    During the year 1920 the petitioners were residents of the State óf ¡Texas and for that year they each filed a separate income-tax return and reported one-half of the community income.
    B.'B. .Norvell owned $20,000. par value of capital stock of The American National Bank of Beaumont, Texas, on March 4, 1920. On that date the stockholders of that bank adopted the following resolution:
    ' Resolved, that under the provisions of the Act of May 1st, 1886, the capital stock of The American National Bank of Beaumont he and the same is hereby increased ipt the sum¡ óf One Hundred and Fifty Thousand ($150,000.00) Dollars, making .the total capital Two Hundred and Fifty Thousand ($250,000) Dollars, to be divided into Twenty-five Hundred (2500) shares of the par value of One Hundred ($100.00) Dollars each.
    'Resolved, that a Stock dividend of1100% be and the same is hereby declared ■payable out 'of the' surplus fund on hand prior to March 1st, 1913, and that the President and Oashier of this iBank are hereby directed to issue 1000 shares .of the capital stock of this Bank to the present stockholders in proportion to the amount of stock now owned by them respectively.
    On the same date the directors of the bank passed a resolution as follows:
    ■ Be it resolved that the resolution this-day adopted by the stockholders of this Bank increasing the capital stock from One Hundred Thousand ($100,000) Dollars, its present capital, to Two Hundred and Fifty Thousand ($250,000.00) Dollars, and the declaration of stock dividend of One Hundred Thousand ($100,000.00) Dollars/payable out of the surplus account prior to March 1st, 1913, be and the same is hereby ratified and confirmed and the proper officers of this bank are hereby directed tó issue 1000 shares of the capital stock of the Bank to the present stockholders in proportion to the amount of stock how owned by them respectively.
    ' On March 5, 1920, the bank issued its check, No. 2178, signed by Chas. H. Stroeck, vice president and cashier, to B. B. Norvell for $20,000. On the face of this check was written “ Stock. Dividend Check from surplus earned prior to March, 1913.” Upon receipt of the check, B. B. Norvell endorsed it as follows: “In payment of 200 shares of stock in American National Bank out of earnings prior to March, 1913. B. B. Norvell.” Whereupon the bank issued to him $20,000 par value of its stock pursuant to the above-quoted resolution.
    The accumulated earnings of the bank for the period beginning March 1,1913, and ending March 4, 1920, were sufficient to cover the 100 per cent dividend declared on the last-mentioned date.
    Prior to December, 1921, the Comptroller of the Currency held that a national bank could not legally declare a dividend payable in its own stock.
   OPINION.

Littleton:

Petitioners contend that the bank declared and paid a stock dividend and that the issuance by the bank of its check to B. 11. Norvell, which was immediately endorsed and returned to the bank before the stock was issued to him, was merely a matter of form in the payment of the stock dividend in order not to violate the instructions of the Comptroller of the Currency, and that this did not make the dividend a cash dividend so as to become taxable income.

The Commissioner contends, first, that, under the instructions of the Comptroller of the Currency to national banks in effect in 1920, a national bank could' not declare a dividend payable in its own stock and that these instructions had the force and effect of law; secondly, that the evidence in this case which shows that the bank issued its check for $20,000 in favor of B. It. Norvell, which he endorsed back to the bank, is insufficient to justify a decision that this was a stock dividend.

The cases heretofore decided by the Board on the question whether a dividend should be treated for income tax purposes as a cash or stock dividend have been cases in which a cash dividend was declared and the stockholders by one means or another in the end were in possession of stock. See Appeals of A. H. Stange, 1 B. T. A. 810; Wm. H. Davidow Sons Co., 1 B. T. A. 1215; Eugene E. Paul, 2 B. T. A. 150; W. J. Hunt, 5 B. T. A. 356. In those cases it was held that the dividend was taxable because “ The result of the dividend resolution was to create the relation of debtor and creditor as between the corporation and its stockholders in the amount of the dividend declared. * * * The agreement between the individual stockholders to purchase new stock with dividends when paid does not serve to change the character of the corporate action and make that a stock dividend which was intended to be a cash dividend.” Appeal of Eugene E. Paul, 2 B. T. A. 150. It would seem to follow from reasoning of the cases cited in the light of the declaration of the court in Eisner v. Macomber, 252 U. S. 189, that, under such circumstances as are presented in this proceeding, the $20,000 dividend should be held to be a stock dividend. In Eisner v. Macomber, supra, the court said (p. 211):

A “ stock dividend ” shows that the company’s accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. Ear from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution.
The essential and controlling fact is that the stockholder has received nothing out of the company’s assets for his separate use and benefit; on the contrary,- every dollar of his original investment, together with whatever- accretions and accumulations have resulted from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out the entire investment. Having regard to the very truth of the matter, to substance and not to form, he has received nothing that answers the definition of income within the meaning of the Sixteenth Amendment.

The American National Bank never declared a cash dividend. The stockholders never acquired any rights to any part of the.cash surplus of the corporation. The stockholders and directors never intended that any stockholders should receive money. The bank desired to issue its increased capital stock to its stockholders against the accumulated surplus and they, as well as the directors, so declared. The resolution of the stockholders shows that they understood, that the dividend was to be a stock dividend and that they were not to receive any cash. The method and manner adopted by the bank to pay the stock dividend by issuing its check in favor of the petitioner designated “stock dividend check” in order to circumscribe the instructions of the Comptroller of the Currency was merely a matter of form and did not affect the substance of the matter. So far as we have been able to find, the National Banking Laws do not prohibit the declaration of a stock dividend by a national bank. The instructions of the Comptroller of the Currency outstanding in 1920 were rescinded by him in 1921 and national banks were then permitted to declare and pay stock dividends. But, whatever may have been the instructions of the Comptroller of the Currency, if a bank declared and paid a stock dividend, which we believe this bank did, the instructions that it might not do so could not make the stock dividend taxable income. The evidence shows that the petitioner and the bank understood that the stockholders were not to receive cash but were to receive stock in accordance with the resolution. The check which was issued to the petitioner was plainly marked “ stock dividend ” and shows that he did not receive it as cash. The bank would not have .cashed it because no cash dividend had been declared and, under the dividend resolution, the petitioner had no claim upon or right to receive any portion of the cash surplus of the bank. As .was said by the court in Eisner v. Macomber, supra, “the essential and controlling fact is that the stockholder has received nothing out of the company’s assets for his separate use and benefit.” See United States v. Mellon, 279 Fed. 910; 281 Fed. 645; United States v. Davison, 1 Fed. (2d) 465; Appeal of Theresa Zellerbaoh, 2 B. T. A. 1076. The surplus still remained the property of the bank and was subject to the risks of the business.

The Commissioner held that this dividend was taxable upon the authority of his Office Decision 588, C. B. No. 3, pi 24, in which he held that:

In view of the fact that national banks are authorized by law to issue only cash dividends (see “Instructions of the Comptroller of the Currency Relative to the Organization and Powers of National Banks ” for 1919, p. 56) such dividends, coupled with the right to apply same to the purchase of an increase in capital stock, are not within the decision of the Supreme Court in the Eisner v. Maeomher ease and are taxable income to the stockholder for surtax purposes.

This ruling has no application here because this was not a cash dividend coupled with the right to apply the same to the purchase of an increase in capital stock. In the opinion of the Board, the $20,000 dividend was a stock dividend and the Commissioner erred in including the same in taxable income.

The deficiency notices disclose that the entire deficiency for 1920 resulted from the inclusion of this dividend in taxable income.

Judgment of no deficiency for the year 19%0 will therefore be entered in each of the proceedings'.


text:
    Archer Maynard Campbell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18320.
    Promulgated February 4, 1927.

      U. H. Shelton, Esq., for the petitioner.

      W. Franlc Gibbs, Esq., for the respondent.
    The Commissioner determined a deficiency of $69.17 for the calendar year 1923. Subsequently the parties stipulated that this was in error and that the notice should have stated a deficiency of $32.82. The question is whether a dividend declared by a corporation in December, 1922, payable January 1, 1923, was' income to the petitioner, a stockholder of such corporation, for the calendar year 1922 or the calendar year 1923.

      FINDINGS OF FACT.
    Petitioner is a resident and citizen of Lynchburg, Ya. During the calendar years 1922 and 1923 be was a stockholder and chairman of the board of directors of the Glamorgan Pipe & Foundry Co., a corporation, with principal office and place of business at Lynchburg, Va. In December, 1922, this corporation declared a dividend payable January 1,1923. The petitioner’s proportion of the dividend amounted to $1,020. On January 1, 1923, the corporation mailed a dividend check to the petitioner at Lynchburg, Ya., which was received by him in due course.
    Petitioner has consistently kept his books and rendered his income-tax returns upon an accrual basis. He accrued this dividend as of the date of the declaration in December, 1922, and included the amount thereof in his gross income for the calendar year 1922 and paid the tax thereon. The Commissioner decided that the dividend was income to petitioner for the calendar year 1923, the year in which it was payable.
   OPINION.

Littleton :

Petitioner consistently kept his books and rendered his returns upon the accrual basis. When the directors of the Glamorgan Pipe & Foundry Co., of which he was chairman, by appropriate resolution in December, 1922, declared the cash dividend, petitioner accrued his proportion thereof upon his books as income and reported the same in his income-tax return- for the year 1922. It is not claimed by the Commissioner and there is nothing to indicate that the method of accounting employed by petitioner in keeping his books of account, in accordance with which his return was filed, did not clearly reflect his income. We therefore approve the petitioner’s treatment of the dividend as income in 1922.

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


text:
    Templeton, Kenly & Co., Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6145, 18432.
    Promulgated February 4, 1927.
    1. During 1918 the petitioner abandoned the use of and scrapped certain material theretofore used in the manufacture of certain designs of Simplex jacks which became obsolete and their manufacture discontinued. Held, that the material scrapped was properly excluded from the closing inventory for 1918.

      2. A salary of $30,000 paid by petitioner to its president in each of the years 1918 and 1919 was, in the circumstances, reasonable.
    3. Petitioner’s income-tax returns for 1918 and 1919 were not willfully false and fraudxilent with intent to defeat and evade the tax.

      Charles E. Watson, Esq., for the petitioner.

      Rarold Allen, Esq., for the respondent.
    The Commissioner determined deficiencies in income and xirofits tax and imposed a 50 per cent fraud penalty, the tax and penalty for 1918 being $75,119.10 and $37,859.55, respectively, and the tax and penalty for 1919 being $5,844.10 and $2,942.05, respectively.
    For 1918 the Commissioner reduced the deduction claimed by petitioner for amortization of war facilities from $26,736.03 to $3,299.58; increased the closing inventory as shown in the return from $49,291.89 to $90,265.28, and held that a salary of $30,000 authorized and paid to the president was unreasonable in amount and reduced the same to $12,000. He also held that this return was willfully false and fraudulent and added a 50 per cent penalty.
    For 1919 the Commissioner reduced the amortization claim from $26,736.03 to $3,299.58, made certain adjustments in the 1919 inventory, reduced the depreciation claimed, disallowed certain items of expense, certain alleged worthless accounts, and reduced the deduction of $30,000 compensation authorized and paid to the president to $12,000 upon the ground that the amount claimed was unreasonable. He also held that the return for this year was willfully false and fraudulent and added the 50 per cent penalty. The Commissioner apparently made a jeopardy assessment of the tax and penalty for 1919 and in the notice of the deficiency denied petitioner’s claim for abatement thereof.
    Petitioner filed separate appeals for each year in which it claimed that the Commissioner’s determinations in regard to the above-mentioned items were erroneous. The proceedings were consolidated by order of the Board upon application of the petitioner for hearing and decision.
    By stipulation filed all issues have been disposed of except the following: (1) Whether the closing inventory for 1918 should be reduced from $90,265.28 to $61,192.61 on account of the value of certain obsolete jack parts alleged by petitioner to have been abandoned and discarded within the year. The Commissioner claims that the obsolete material was not abandoned and discarded until 1919 and, therefore, should not come out of the 1918 closing inventory. (2) Whether petitioner is entitled to a deduction of $30,000 for compensation of its president for each of the years 1918 and 1919. (3) Whether the returns for the j^ears involved were willfully false and fraudulent with intent to evade the tax.
    • FINDINGS OF FACT.
    Petitioner is an Illinois corporation, engaged in the manufacture of jacks for.the most part of heavy type for use largely in railroad and mining industries, with principal office in Chicago. The corporation was organized as a small concern by Walter B. Templeton in 1901, since which time he has been president, and in complete charge of all the corporation’s business and affairs. He secured patents covering articles produced by the company. Since the beginning he has been its sole executive head, its designing engineer, and has directly supervised all of its manufacturing operations. He personally-had charge of all sales.
    During the taxable years Templeton owned 75 per cent of the outstanding common stock of the corporation consisting of $75,000 par value. Annual dividends of 8 per cent were paid upon the preferred stock but no dividends have ever been paid upon the common stock, the earnings of the company being at all times left in the business^ Templeton’s object at all times has been the company’s success. In years prior to the taxable years involved Templeton and the directors gave little or no consideration to the matter of his compensation as compared with the value of his services. It was Templeton’s desire that as much of the company’s earnings as possible remain in the business and the amount of his salary was predicated primarily upon his personal financial requirements. The directors frequently suggested the allowance of a greater salary to him. The amount of Templeton’s salary for the taxable years was in no way predicated upon the stock holdings and was decided upon and fixed at the instance of the other four directors, without any suggestion or request on his part. At the beginning of the year 1918 Temple-ton’s salary,. under prior authorization of the directors, stood at $12,000 per annum. Later in the year the directors gave further consideration to the matter of . his salary from the standpoint of their opinion as to the value of the services being rendered by him and of the salaries paid for similar services by other concerns engaged in like or similar business, and, after due consideration and deliberation, the directors voted on December 21,1918, to increase the present salary of $12,000 to $30,000, effective January 1, 1918, as disclosed by a resolution providing “ That the salary of Walter B. Templeton be and is hereby increased from $12,000 to $30,000 per year, effective January 1, 1918. Carried.” By resolution adopted February 15, 1919, Templeton’s salary for the year 1919 was fixed at $30,000 and said resolution further provided that “the amount of salary to be paid to the other officers was left to the discretion of^ the president.”
    Templeton devoted all of his time and energy to the business and the success of the enterprise was due primarily to his services. In the second year of petitioner’s operations another manufacturing concern offered Templeton an annual salary of $8,000. In 1912 Templeton was offered a salary of $18,000 per annum by a competing concern if he would come with that company as designing engineer. In 1918 Templeton equipped a bedroom in the office of the petitioner’s plant and throughout that year lived in the plant so that he could more efficiently promote the interests of the company. This demonstrated the character of the services which he at all times rendered to the company.
    During 1918 petitioner earned approximately 75 per cent on its common stock after the payment of the $30,000 salary to the president and a dividend of 8 per cent upon the preferred stock of $25,000.
    During 1918 the corporation was engaged in war production. In November of that year when this production ceased the company found itself without a great many orders for its product. Thereupon Templeton, as he had in the past, devoted himself diligently in connection with his other duties to the matter of obtaining orders for the company’s product from commercial enterprises, with the result that petitioner’s operations continued in the normal way, and during the year 1919 the company earned 20 per cent on its common stock after the payment of the salary of $30,000 and an 8 per cent dividend upon the preferred stock. In May, 1920, Templeton employed one H. B. Hench to assist him in the matter of sales, at a salary of $8,000 per annum with a bonus, and, in July, he employed one L. E. Allen to assist him as manager of the plant at a salary of $10,000 per annum. Thereupon Templeton voluntarily reduced his salary from $30,000 to $20,000, the reduction being in the amount paid to his assistant during the remainder of the year 1920.
    During the year 1918 certain models of jacks theretofore manufactured by the petitioner and a certain quantity of parts on hand became obsolete and their manufacture and sale was discontinued due to the inauguration of a policy to manufacture and offer for sale only new and improved designs. In addition a large amount of parts on hand at the close of the war in November, 1918, which had been made for use in the manufacture of jacks designed exclusively for war purposes, could no longer be used and such parts were of no value. In 1918 the company discontinued manufacturing and offering for sale certain designs of jacks which had been superseded by improved and more efficient models, and, in November, the manufacture of all models for war purposes was discontinued. In the latter part of November, or in the early part of December, 1918, Tem-pleton, who was in charge of all of petitioner’s activities, definitely abandoned and discarded all jack parts on hand designed for use in connection with old and superseded models and war models and gave instructions that this obsolete material be removed from the inventory and scrapped. These parts were not physically removed from the plant and junked until the taking of the closing inventory between December 25, 1918, and the early days of January, 1919. The books of the company were held open and were not closed until some time in 1919. The treasurer and the bookkeeper of the company took the 1918 closing inventory and for the purpose of accurately arriving at the amount thereof inventoried the obsolete and discarded parts at cost (about which there is no question) separately, along with other material, and the total figure shown was $90,265.28. In this figure there was erroneously included an item of small tools at $2,000. This item was earned as an asset upon the books at a fixed charge of $8,500. After the inventory had thus been listed and before the books were ■ closed and the income-tax return prepared, the obsolete and discarded jack parts and the items of small tools were eliminated from the closing inventory: These items were as follows:
    Model No. 1_$11,017. 85
    No. 6- 3, 578.73
    No. 15- 657. 47
    No. 31- 280. 57
    . No. 44- 1,100. 54
    No. 47- 9, 684. 05
    No. 50- 2, 558. 94
    No. 51- 1, 072.25
    No. 62- 2, 501. 49
    No. 312- 712.30
    No. 315- 3, 511.30
    No. 318- 2,297.90
    Small tools_ 2,000.00
    Totaling- 40,973.39
    These jack parts could not be utilized in the manufacture of new and improved designs.
    In its return for 1918 petitioner claimed its closing inventory to be $49,291.89. By the end of 1918 petitioner had received a few orders for certain of the old style jacks and parts, principally from railroads, and during the year 1919, although the superseded models were not being regularly manufactured or offered for sale, petitioner received intermittent orders, without solicitation, for certain of the old model jacks and parts. In order to fill these orders petitioner retrieved certain of the scrapped material as follows:

    The obsolete and discarded material above tabulated was physically thrown out in a junk pile early in 1919.
    The parties, in the stipulation filed prior to the hearing, agreed that the 1918 closing inventory was either $61,192.61 as contended by petitioner, made up of $90,265.28, less obsolete parts amounting to $38,973.39 and the small tools item amounting to $2,000, plus the retrieved material amounting to $11,900.72, or $90,265.28, which the Commissioner, while not questioning the figures or the fact that the jack parts listed could be used only in connection with jacks no longer manufactured, claims was the correct closing inventory.
   OPINION.

Littleton:

Little need be said in discussing the matter of compensation paid by petitioner to its president for 1918 and 1919. Templeton testified in detail concerning the business of the corporation and the duties performed by him during the taxable years. As was said by the Board in the Appeal of Woodcliff Silk Mills, 1 B. T. A. 715

The amount of compensation which a corporation shall pay its officers for their personal service is, in the first instance, a matter within the judgment and discretion of its hoard of directors, and the only limitation upon the deduction of such amount for income tax purposes is that the amount must be reasonable.

Measured by the results accomplished, both from the standpoint of volume of business transacted and profits arising to the corporation therefrom and the nature of the services rendered by the president, the Board is of the opinion that the amounts paid to Temple-ton as compensation were not unreasonable or excessive and should be allowed as a deduction.

We think the Commissioner erred in determining that petitioner’s 1918 closing inventory was $90,265.28. Jack parts amounting to $38,973.39 became obsolete, their use was abandoned, and they were discarded in November or December, 1918. The president of the corporation, who was in complete charge of every activity, gave directions and instructions in November or December, 1918, that certain models of jacks hereinbefore mentioned were to be no longer manufactured or offered for sale, that only the new and improved jacks should thereafter be manufactured and offered for sale, and these instructions were carried out. He also abandoned the use of and discarded all parts for the manufacture of jacks for war purposes. The obsolete and discarded parts were not physically thrown out of the plant into the junk pile until the taking of the inventory had been completed, which was early in 1919. This was probably due to the fact that, upon cessation of war in November, 1918, the nature of the company’s output changed completely and every effort was being made by everyone to secure and fill commercial orders for new jacks to the end that the company should not suffer by reason of the cancellation of its war contracts. But we think from the evidence in this proceeding that the matter of actually casting the obsolete and discarded parts into the scrap heap should have no bearing upon the value of the closing inventory. The throwing out of such material is merely evidentiary of its obsoleteness and abandonment. Without that act having been performed we are satisfied that the jack parts manufactured were obsolete and that the petitioner abandoned their use and discarded them in the year 1918. They were, therefore, properly excluded from the closing inventory. The listing and valuation thereof at the time of taking the closing inventory was merely for the purpose of accurately arriving at the correct inventory and for the purpose of having a correct account of the junkecl material to be entered upon the books. The item of tools was carried in the asset account at a fixed amount of $8,500 and the item of $2,000 for tools should not therefore be included in the inventory.

The 50 per cent fraud penalty for each of the years appears to have been imposed by the Commissioner because of his conclusion that petitioner willfully understated its closing inventory of 1918 and that it unjustifiably claimed certain improper deductions in both 1918 and 1919. In view of the evidence before the Board, we are of the opinion that the Commissioner was in error in this regard and that the returns were not willfully false and fraudulent with intent to evade the tax.

We have approved the petitioner’s determination of its closing-inventory and have found that the salaries paid to its president were not unreasonable. The other matters, which have been disposed' of by stipulation, relating to the deduction for amortization of war facilities, depreciation, expenses, and worthless debts, appear unimportant from the standpoint of fraud. They were not seriously urged before the Board in support of the imposition of the penalty in either year. In view of the evidence, the Board is of the opinion that no penalty should be imposed for either the year 1918 or 1919.

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


text:
    Chas. H. Sachs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7561.
    Promulgated February 4, 1927.
    1. A debt determined to be worthless and charged of£ during the year was a proper deduction from gross income.
    2. That portion of the expense of operating and maintaining automobiles applicable to their use by petitioner in going from his home to his place of business and in returning to his home is not a proper deduction from gross income as an ordinary and necessary business expense. The evidence is not sufficient to enable the Board to determine what portion, if any, of the upkeep and operating expense of two automobiles was applicable to the use thereof by petitioner in carrying on his profession as a lawyer.
    S. In the absence of evidence of the value on March 1, 1913, of certain property purchased in 1901 and sold in 1921, the gain or loss upon the sale thereof can not be determined.

      F. R. Gibbs, Esq., for the petitioner.

      Wm. H. Lawder, Esq., for the respondent.
    The Commissioner determined a deficiency in income tax of $569.92 for the calendar year 1921 resulting from the disallowance of (1) a deduction of $1,000 for alleged worthless debts; (2) $1,350 alleged to have represented one-half of the cost of operating automobiles for business purposes; (3) an alleged loss of $500 on the sale of a farm. Petitioner claims these disallowances were erroneous.
    FINDINGS OF FACT.
    Petitioner is a resident of Pittsburgh, Pa., where he is engaged in the practice of law. On February 20, 1919, he loaned one Louis Fink, of New York, who was engaged in the operation of a moving picture theater, the sum of $1,000. Fink agreed to repay the loan in nine months; however, at the end of that period, he was not in position to do so and petitioner did not at that time press him for payment. Thereafter petitioner endeavored to collect the amount of the loan. In 1921 Fink was heavily in debt and failed in his moving picture venture and his business was sold out. At the end of-1921 Fink was without assets and petitioner determined the debt to be worthless. In his income-tax return for 1921 he deducted the amount from gross income.
    During 1921 petitioner owned two automobiles, a Standard “ 8 ” and a Studebaker “ 6.” The Standard was purchased in 1917 at a cost of $1,900 and the Studebaker was purchased in 1921 at a cost of $2,000. Petitioner used these automobiles for personal and general family uses and in going to and from his home, and, to some extent, in connection with the practice of his profession whenever the occasion for such use arose. His office was in the Frick Building, in Pittsburgh, and from October to May his residence was at 5541 Hays Street, Pittsburgh. He had a summer home at Penn Township, Allegheny County, about fifteen miles from his office, at which he resided from May to October each year. He also used one of his automobiles in going to and from his office while living at his summer home.
    During the year 1921 petitioner expended the following amounts in the operation and upkeep of these two automobiles, including chauffeur’s wages:
    Glesenkamp & Sons Go., repairs, etc_ $175. 00
    Miscellaneous repairs_ 176. 31
    .Gas, oil and Gres at $35 a month_ 420.00
    Chauffeur’s wages_ 1,200.00
    Total-1, 971. 31
    On September 14, 1901, petitioner and his partner, one Spiro, purchased an equal interest in a parcel of land situated in Union Township, Allegheny County, on which there was located a two-story frame dwelling house and outbuildings. The consideration paid for this property was $62 in cash and the assumption of a mortgage debt of $1,500, with interest at 6 per cent from December 11, 1900. In 1902 petitioner purchased Spiro’s interest at cost to him, and from time to time thereafter made payments on the mortgage indebtedness which was finally discharged on January 27, 1911. The property has at all times been rented. From time to time during petitioner’s ownership of the property he expended undisclosed sums for repairs, additions, and upkeep. On May 18, 1921, he sold the property for $1,300.
   OPINION.

Littleton:

We are satisfied from the evidence that the debt of $1,000. due the petitioner from Fink was properly determined to be worthless and charged off within the year 1921, and was, therefore, a proper deduction from gross income.

Petitioner claims that to the items of automobile expense herein-before set forth there should be added $1,000 for exhaustion, wear and tear, making a total of $2,971.31, and that one-half of this amount was a proper deduction from his gross income for 1921 as ordinary and necessary business expense. That portion of the cost of upkeep and operation of the automobiles which was properly chargeable against their use by the petitioner in going between his home and. his office was not an ordinary and necessary expense. Appeal of Frank H. Sullivan, 1 B. T. A. 93. The evidence as to the extent to which the automobiles were used by petitioner strictly in connection with his profession is not sufficient to enable the Board to determine what portion, if any, of the total expense should be allocated thereto. We therefore approve the Commissioner’s dis-allowance of this item.

The Board can not determine from the evidence whether or not the petitioner sustained a deductible loss in 1921 on the sale of the property mentioned. We can determine the cost thereof in 1901 and the sales price in 1921, but we have no evidence of the cost of additions or of the value of the property on Marcli 1, 1913. Without this information we can not say that petitioner sustained a deductible loss of $500 or any other amount on the sale.

In view of this we affirm the Commissioner’s determination in this regard.

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


text:
    J. J. Melick, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7623.
    Promulgated February 7, 1927.
    The stock in a bank owned by the petitioner was worthless at the end of 1921 and the cost thereof was a proper deduction from gross income as a loss sustained in that year.

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

      W. Frank Gibbs, Esq., for the respondent.
    The Commissioner determined a deficiency in income tax of $1,989.28 for the calendar year 1921. The issue involved is whether the petitioner is entitled to a deduction of the cost of 200 shares of the capital stock of the Atlas Bank of Neligh, Nebraska, which he alleges was worthless at the end of the calendar year 1921. The Commissioner refused to allow any deduction on this account.

      FINDINGS OF FACT.
    For the past fifteen years petitioner has been a resident of Omaha, Nebr. For about ten years prior to the taxable year he was a stockholder and a director of the Atlas Bank of Neligh, Nebraska. In 1900 the outstanding capital stock of the Atlas Bank consisted of 150 shares of the par value of $100 each. In that year petitioner purchased 37% shares for $3,750 and since that date he has at all times owned one-fourth of the outstanding capital stock. Between 1900 and June, 1908, petitioner received a total of 37% shares as stock dividends. On the last mentioned date the corporation issued 200 shares at par, of which number petitioner purchased 50 shares at $100 per share. On March 1, 1913, the outstanding capital stock of the bank was of the par value of $50,000, of which petitioner owned 125 shares of the par value of $12,500. The cost of this stock to him was $8,750. The fair market value of the shares owned by him on March 1, 1913, was $100 a share. On January 18, 1918, petitioner received 62% shares as a stock dividend and purchased 12% shares at par, so that in 1918 he was the owner of 200 shares of the par value of $20,000 which had cost him a total of $10,000. On January 17, 1919, petitioner paid an assessment of $7,500 on his stock levied by the stockholders and directors for the purpose of erecting a new bank building, resulting in a total cost to him of $17,500 for the 200 shares of stock which he owned throughout the year 1921.
    During 1921 there were four stockholders of the bank, three of whom were officers and directors. During that year the bank had outstanding a large amount of loans, principally to farmers, which loans were secured by mortgages on lands, crops, and personal property. In 1921 there was such a decline in the market for farm lands, equipment, and farm products that the collateral held by the bank on loans made was of little value and the debtors found themselves unable to pay off the loans on account of their inability to obtain the expected price for their crops, the price of corn having fallen from $1.80 to 80 cents a bushel. During the year large amounts of loans became due and were not paid. Mortgages were foreclosed and little or nothing was recovered in a great many instances. The stockholders and directors of the bank were fully aware of the situation and realized in the latter part of October and early in November, 1921, that the bank was insolvent. Various banks in Omaha held practically all of the collateral of the Atlas Bank and it was indebted to these banks in large amounts for which the petitioner and other stockholders were guarantors. The stockholders and directors held frequent meetings in November and December, 1921, and discussed the situation among themselves. They made an examination of the notes and collateral and determined that at least $310,000 thereof was worthless. At that time the capital of the bank amounted to $80,000 and the records showed a bank surplus of only $12,000. The stockholders realized that they would be required to pay the amount of their liability as stockholders. Early in November, 1921, certain drafts were drawn on the Atlas Bank by the Omaha banks which the Atlas Bank was unable to pay. Thereupon a conference was held between the officers of the Omaha banks and the Department of Trade and Commerce of Nebraska (Banking Department), in which conference the Omaha banks and the Department of Trade and Commerce selected a man to take charge of the Atlas Bank. The bank was not closed but this representative was placed in complete charge of it on November 5, 1921. He found the situation to be as above outlined. He devoted himself principally to the investigation and collection of outstanding loans. On December 5, 1921, an examiner of the State Department of Trade and Commerce made an examination of the Atlas Bank, reporting to the Department that the bank was carrying on its books as assets $200,000 of worthless notes and unless these notes were removed from the assets by the substitution of cash, or other bankable paper, the Atlas Bank was hopelessly insolvent.
    Conditions grew steadily worse after the date of this report and the amount of worthless notes increased. The Atlas Bank was hopelessly insolvent at the end of the calendar year 1921 and its stock was worthless. This fact was known to the officers and stockholders. The representative of the Department of Trade and Commerce who was in charge of the bank notified the petitioner and other stockholders in December, 1921, that an assessment upon their stock would have to be paid. The directors and stockholders held meetings about twice a week dui’ing December, 1921. In February an assessment of 75 per cent was paid by the stockholders upon their stock. Each of the four stockholders paid or gave their secured note for $15,000. The petitioner paid his assessment in cash. The vice president, who was one of the stockholders and who had been in active charge of the bank, paid in to the bank his note for $36,000 in addition to his assessment. The cashier, who was not a stockholder, paid in his note for $22,000. The assistant cashier, who was not a stockholder, paid in his note for $2,000. This cash and these notes were substituted for $118,000 of the worthless notes. But this did not render the bank solvent.
    The representative of the Department of Trade and Commerce remained in charge of the bank and kept it open. In May, 1923, the bank was formally taken over by the Department of Trade and Commerce of the State of Nebraska and placed in the hands of a receiver. Seven hundred and ninety-eight thousand dollars of the guaranty fund of the State of Nebraska was used to pay depositors of the Atlas Bank. The assets of the bank were of a value not in excess of $52,000. Certain of the officers and stockholders of the Atlas Bank, including petitioner, had personally paid 'a considerable portion of the indebtedness of the Atlas Bank to other banks, which indebtedness they had guaranteed.
    Petitioner did not personally make out his 1921 income-tax return but employed some one else to prepare it for him. Petitioner was not familiar with the income-tax law and, when he explained the Atlas Bank matter to the person whom he had employed to prepare his return, he was advised to claim a deduction of $15,000, assessment upon his stock, and this deduction was shown in the return with the explanation that it was “ a loss on account of money paid to the Atlas Bank of Neligh, Nebraska, at the instance of the stockholders and the State Banking Board,.to keep the bank from closing its doors on account of depleted capital through loss of assets.” Subsequently petitioner claimed before the Commissioner that, instead of the $15,000 deduction, he was entitled to a deduction of the cost of his stock which became worthless in 1921. The Commissioner disallowed the deduction of $15,000, refused to allow any loss on account of the bank stock, made certain other minor adjustments not in controversy here, and determined the deficiency here involved.
   OPINION.

Littleton :

We think the petitioner has shown that he sustained a loss in 1921 of the cost of the stock owned by him in the Atlas Bank. He and the president and the cashier of the bank testified in detail concerning the affairs and condition of the Atlas Bank during 1921; the secretary of the Department of Trade and Commerce of Nebraska explained that Department’s relation with the bank. Petitioner and other officers of the bank who were thoroughly familiar with its condition and assets testified positively that they knew the bank was hopelessly insolvent in November and December, 1921, and that they had not the faintest hope that it could be saved. The control and management of the bank was taken from them in November, 1921.

As early as November of that year the bank was unable to meet its drafts. Debtors of the bank were unable to pay their loans already due, and collaterals which the bank held were practically if not entirely worthless. They determined that at least $310,000 of such loans were worthless. They knew that other loans soon to become duo would likewise be worthless on account of agricultural conditions.

Petitioner had an investment of $17,500 in the 200 shares of stock of the Atlas Bank of Neligh, Nebraska, and the Board is convinced from a consideration of all the evidence that this investment was a loss in 1921. He was therefore entitled to deduct that amount from gross income for that year as a loss sustained under the provisions of section 214 of the Revenue Act of 1921.

Judgment will he entered on 15 days’ notice, wider Rule 50.