author: Geeen:

text:
    J. Fred Smith Gravel Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 735.
    Decided November 24, 1926.
    The petitioner corporation, both before and after March 1, 1913, acquired gravel lands in exchange for its stock. Upon the evidence, held, that the Commissioner did not err in his computations of value and cost used by him in the computation of invested capital and the allowance for depletion.

      George S. Atkinson, Esq., and Luke B. Garvin, C. P. A., for the petitioner.

      B. H. Saunders, Esq., for the respondent.
    The petitioner has appealed from the determination of deficiencies in income and profits taxes for the years 1920 and 1921, totaling $2,761.36. Four errors are alleged in the petition, as follows:
    (1) The Commissioner has illegally disallowed depletion deductions for the calendar years 1920 and 1921 on the basis of a fair market value as at March 1, 1913, of gravel deposits acquired prior to March 1, 1913, allowing only depletion deductions on the basis of cost.
    (2) The Commissioner has illegally disallow ed depletion deductions for the calendar years 1920 and 1921 on the basis of the value definitely known on May 1, 1913, and accurately ascertainable on May 1, 1913, of gravel deposits transferred to the corporation in exchange for stock and having a value substantially in excess of the consideration paid therefor, allowing only depletion deductions on the basis of cost.
    (3) The Commissioner has, in computing profits taxes for the calendar years 1920 and 1921, illegally disallowed paid-in surplus represented by property transferred to the corporation on May 1, 1913, by stockholders, which said property as of that date had a value clearly and substantially in excess of the par value of the stock exchanged therefor, allowing only in the computation of invested capital the par value of the stock so exchanged.
    (4) The Commissioner has, for the purpose of computing the profits taxes for the calendar years 1920 and 1921, illegally reduced the invested capital for each of said years by assessing illegal and excessive income tax for the calendar year 1916 and illegal and excessive income and profits taxes for the calendar years 1917, 1918, and 1919.
    ETNDINGS OP PACT.
    The petitioner is a corporation organized under the laws of the State of Texas and engaged in the business of producing and selling gravel from its own properties situated near the City of Dallas. Prior to October 1, 1912, the date of its organization, the initial stockholders of the corporation were engaged in a similar business individually and the corporation was formed to take over from the individuals the various gravel deposits owned by them and to carry on the business. The individuals had purchased as farm lands the properties which they conveyed to the corporation and had developed them to the extent that it was known that said lands contained commercial gravel in paying quantities.
    On October 1, 1912, the petitioner acquired the first of several pieces of gravel-bearing lands. This tract, known as the Trinity Mills tract, consisted of approximately 100 acres, of which 66 were gravel lands, and was transferred to the petitioner in exchange for its stock of the par value of $30,000. On March 1, 1913, this tract contained 654,402.25 cubic yards of commercial gravel. On October 10, 1912, the petitioner acquired the Stanley tract containing 50 acres. This was transferred to the corporation in exchange for its stock of the par value of $15,000. On March 1,1913, there remained 335,754.5 cubic yards of gravel. On November 7,1912, the petitioner purchased the Good tract containing 4.7034 acres of land, paying therefor a cash consideration of $2,116.53. On March 1, 1913, there remained in this tract 23,944 cubic yards of commercial gravel. On May 1, 1913, the petitioner, in exchange for its capital stock of the par value of $50,000, acquired from two of its stockholders gravel lands known as the Stanley and May tract, consisting of 220 acres and containing on that date 1,071,396.54 cubic yards of commercial gravel. The residual value after the removal of all gravel was $5,235. On the same date it acquired from its stockholders in exchange for its capital stock of the par value of $21,287.84 what was known as the Gribble and Trinity Mills tracts, consisting of 298.4 acres and containing 208,385.8 cubic yards of commercial gravel. On March 5, 1913, it purchased for a cash consideration of $1,000 what was known as the Cobb tract. This tract was of the area of 6.71 acres, of which approximately two acres contained 30,815 cubic yards of commercial gravel, this amount being the total gravel contained on the tract. The non-gravel lands, being approximately 4.71 acres, had a value at the date of acquisition of $25 per acre.
    On August 9,1920, the petitioner submitted to the Commissioner a compilation entitled “Schedule for Valuation of Deposits of Nonmetals,” in which, among other things, appeared the following statement:
    As shown in Exhibit “A” the J. Fred Smith Gravel Company purchased in 1912 and 1913 certain tracts of gravel land, giving in exchange therefor stock of the total par value of $116,287.84. In order to establish the fair market value of this stock at par we submit below a list of stock sales made by the J. Fred Smith Gravel Company in 1912 and 1913.
    DATE SALE NUMBEB AMOUNT
    1912 TO WHOM SALE MADE SHAKES PAID
    Oct. 10 Ernest E. MeAnelly, Dallas, Texas_ 25 $2, 500. 00
    J. S. M. McKamey, Gregory, Texas_ 5 500. 00
    Oct. 21 McKamey Brothers, Port Lavaca, Texas_ 10 1,000,00
    1913
    May 26 Ernest B. MeAnelly, Dallas, Texas_ 20 2,000.00
    May 20 H. T. Farrell, Plano, Texas_ 150 15, 000.00
    May 20 A. A. Fielder, Sherman, Texas_ 100 10, 000. 00
    June 10 J. E. & J. W. Ehea, Boswell, N. M_ 250 25, 000.00
    (J. E. Bhea spent five days thoroughly inspecting the properties and the office records before giving us his check for $25,000.00.)
    In the year 1920 the Commissioner determined that the petitioner was entitled to a depletion deduction of 4.658 cents for each cubic yard of gravel removed, and allowed upon this basis a total depletion deduction of $6,688.99. During that year there was removed and sold by the petitioner 143,602.13 cubic yards of gravel.
    For the year 1921 the Commissioner computed the depletion deduction upon the basis of 4.737 cents per cubic yard of gravel, and in that year the petitioner produced and sold 82,060.46 cubic yards of gravel.
   OPINION.

Geeen:

In computing the petitioner’s invested capital and the depletion allowances, the Commissioner used as the cost of the gravel lands acquired in exchange for stock the par value of the stock issued therefor. As to those lands acquired prior to March 1, 1913, he held that between the date of acquisition and March 1, 1913, there was no change in value.

The petitioner contends that its gravel lands were worth at the date of their acquisition at least $1,000 per acre and that the depletion computed on that basis is, for 1920, 8.6985 cents, and for 1921, 8.7175 cents per cubic yard, and that it is entitled to a paid-in surplus equivalent to $900 per acre.

Of the six tracts of gravel lands acquired by the petitioner, three were acquired before March 1, 1913, and three acquired after that date. One tract out of each group was acquired for cash and the others were acquired in exchange for stock. The tracts acquired for cash are relatively unimportant and the crucial question in the case is the value of the stock exchanged for the four tracts.

The record discloses a series of sales of this stock commencing on October 10, 1912, and continuing to June 10, 1913. There were, in all, seven different sales. They range in size from 5 to 250 shares. In each instance they were sold for cash at par. There is nothing in the evidence which reduces the probative effect of these sales. We are of the opinion that the stock of the petitioner at the various times of its exchange for property had a value of $100 per share.

Our conclusion as to the value of the stock exchanged fixes the cash value of the properties acquired. This disposes of the question as to invested capital, since the statute requires that properties acquired for stock shall be included at their cash value.

The other questions relate to the correctness of the depletion allowance used by the Commissioner. We have found that the stock of the petitioner at the time of its exchange was worth par, and from this it follows that the cost of the two tracts acquired in exchange for stock subsequent to March 1, 1913, was the par value of the stock exchanged therefor.

The Stanley and May tract, acquired May 1, 1913, for stock of the par value of $50,000, contained 1,071,396.54 cubic yards of gravel. Using the value of the stock as the measure and deducting the residual value, we have $44,765 as the cost of the gravel, or a cost per jmrd of 4.178 cents, which is somewhat less than the 4.658 cents used by the Commissioner in his computation for the year 1920. We are not advised as to the elements of depletion other than cost claimed by the petitioner or used by the Commissioner.

On the same date, i. e., May 1, 1913, the petitioner acquired the Gribble and Trinity Mills tracts, containing 208,385.8 cubic yards of gravel, in exchange for its stock of a par value of $21,287.84. This gives a cost per cubic yard 10.215 cents. However, it is noted that this tract was acquired from the same individuals as was the Stanley and May tract and on the same date, and that, while this tract was larger by 76.40 acres, its gravel content was 863,010.74 cubic yards less. We are unable to account for this difference in cost.

The Cobb tract, consisting of 6.71 acres, containing 30,815 cubic yards of gravel, was purchased on March 5, 1913, for $1,000 in cash. Of this approximately two acres contained gravel. The non-gravel lands were worth $25 per acre. The 30,815 cubic yards therefore cost $882.50 or 2.86 cents per cubic yard.

The Good tract, consisting of 4.7034 acres, was acquired on November 7, 1912, for a cash consideration of $2,116.53. On March 1, 1913, this tract contained 23,944 yards of gravel, but the evidence does not disclose its gravel content at the date of acquisition and it is impossible for us to compute the cost per yard of the gravel in this tract.

We are not advised of the amount which the Commissioner used as the cost of the three tracts acquired after March 1, 1913, nor are we advised as to the amount which the Commissioner used as the March 1, 1913, value of the three tracts acquired prior to March 1, 1913. All we have is the depletion allowance per cubic yard. This the Commissioner computed to be 4.658 cents for all of the gravel. The average cost per yard of the gravel acquired subsequent to March 1, 1913, is slightly over 5 cents per yard, and this we assume is the cost used by the Commissioner, inasmuch as we have used his valuation of stock. This average cost is slightly in excess of the depletion allowance. If we use this average cost as the value per cubic yard of the gravel in place in the three tracts acquired prior to March 1, 1913, the excess remains the same. The Commissioner’s depletion allowance for 1920 is approximately one-half cent per yard less than the March 1, 1913, value or cost as computed by us. It is obvious that our computation of the March 1, 1913, value is inaccurate.. We have used stock sales as the measure of the value of stock exchanged for gravel lands and thus computed the cost of two of the tracts. For one tract this cost is 4.178 cents and for the other 10.215 cents per cubic yard. We averaged these costs with the cash purchase at 2.86 cents per yard, and the average thus obtained was used as the March 1, 1913, value of the gravel in the three tracts first acquired. All of this we have done to test the correctness of the Commissioner’s depletion rate applied to the gravel acquired both before and after March 1, 1913. Our computation of value does not take into consideration many factors, as, for example, accessibility, depth of strata, over-burden, or subsequent expenditures, because this data was not furnished us.

Since our computation gives a depletion allowance only one-half cent (approximately) greater than that used by the Commissioner for 1920 (less in the case of 1921), and since onr computation is based upon costs and values that are at best only inaccurate estimates, we can not say that the Commissioner erred.

Each of the errors alleged relates to value or cost used in the computation of invested capital and of the depletion allowance. We find no error in either as determined by the Commissioner.

Judgment will be entered for the Oom-missioner.


source: Caselaw Access Project

author: MoRRis:

license: Public Domain

text:
    Chicago Nut Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19180.
    Decided November 24, 1926.
    In determining whether the net income for 1922 is $26,000 or less and the credit of $2,000 provided for by section 236 (b) of the Revenue Act of 1921 is to be allowed, the net loss provided for by section 204 (b) may not be deducted.

      V. E. Wilde, for the petitioner.

      Joseph K. Moyer, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income tax of $645.80 for the year 1922, of which $250 is in controversy.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of the State of Illinois in April, 1902, and is engaged in the manufacture of nuts, screws, washers and other metal products. Its net income for the year 1922, before the allowance of any loss under the provisions of section 204 of the Revenue Act of 1921, was $46,562.60. The net loss of the petitioner for the year 1921, under the provisions of section 204 of the Revenue Act of 1921, was $34,141.07. The income subject to tax and upon which the present deficiency is computed for the year 1922, after applying the loss under section 204, amounts to $12,421.53.
    In computing the deficiency here in question the Commissioner denied the petitioner the specific credit of $2,000 provided for under section 236 (b) of the Revenue Act of 1921, upon the ground that the net income of the petitioner was in excess of $25,000.
   OPINION.

MoRRis:

The petitioner contends that its net income for 1922, after making due allowance for net loss in the year 1921 and applying the provisions of section 204 of the Revenue Act of 1921, is less than $25,000, and that it is thereby entitled to the $2,000 credit. That question has already been decided adversely to the petitioner in the Appeals of American Varnish Co., 2 B. T. A. 201, and S. W. Bridges & Co., 4 B. T. A. 750, and upon the authority of those appeals the determination of the Commissioner is approved.

The deficiency for 1922 is $815.80. Order will he entered accordingly.


text:
    Fannie L. Wilson, Executrix, Estate of Chasles Scotto Wilson, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4909.
    Decided November 24, 1926.

      Wm. E. Lady, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
   MoRRis:

This proceeding is for the redetermination of a deficiency of $46.15 in estate tax. The Commissioner valued two lots included in the estate at $20,000 gross, while the petitioner is contending for a valuation of $14,000.

FINDINGS OF FACT.

Charles Scotto Wilson died in Florence, Italy, on April 1,1922, his wife, Fannie L. Wilson, being appointed the executrix of his estate. At the date of his death he was a resident of Los Angeles County, California.

Included in the estate were two lots, encumbered by a mortgage, the amount thereof with interest thereon accrued to the date of decedent’s death being $3,738.85, described as lots 2 and 3, Block K, of the Palisades, located in Santa Monica, Los Angeles County, Calif. The lots were bought six or seven years prior to decedent’s death for $9,000. They lay side by side and were each 108 feet in width by 207 feet in depth.

About two years prior to his death the decedent attempted to dispose of the lots for approximately $12,000 but was unable to secure any offers to purchase. Prior to 1922 there was very little activity in real estate in Santa Monica, but shortly after the death of decedent property values increased phenominally. On August 20, 1922, slightly more than four and one-half months after the death of decedent, his wife accepted an offer to purchase the lots for $16,000. The contract was abandoned because the will had not been probated and because of advice of her counsel not to sell. In September, 1922, William Campbell and Charles A. Tegner, real estate men with years of experience, made a proposition to Mrs. Wilson for their clients to purchase the lots for $16,000. Campbell was unable to make this sale because, as he expressed it, “ Mrs. Wilson couldn’t deliver the goods as the saying is, as the matter was in probate, I think, so that everything didn’t go through.”

Thereafter, in April, 1923, the lots were sold for $26,000 to the same parties who made the offer to buy in September, 1922. Mrs. Wilson secured an order from the court allowing the sale. In October, 1923, the purchaser sold the lots for $55,000.

The value of the lots, free of encumbrance, on April 1, 1922, was $14,000.

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


author: Stekniiagen:

text:
    Arthur C. Levering, Petitioner, v. Commissioner of Internal Revenue, Respondent. Leonard M. Levering, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 5657, 7906.
    Decided November 26, 1926.
    The share of profit from a joint venture is income to the ven-turer, although transferred to another immediately upon its receipt.

      Theodore B. Benson, Esq., for the petitioners.

      W. Frank Gihhs, Esq., for the respondent.
    Deficiencies of approximately $4,200 as to Arthur C. Levering and $2,491 as to Leonard M. Levering, Jr., income taxes for the year 1920, resulting from the inclusion by the Commissioner as income of each of the petitioners of a share of the profits of a pool. The cases were duly consolidated for hearing and disposition.
    FINDINGS OF FACT.
    The petitioners are brothers and constitute the partnership of Levering & Levering, carrying on a brokerage business. In 1918 their father organized a pool to buy potash in Germany and import it and sell it in this country. One hundred and five thousand dollars was required to finance the transaction. This amount was subscribed for by several individuals, including the petitioners, although they did not advance or otherwise pay any money into the pool. The aforesaid amount was advanced entirely by the Piedmont Mt. Airy Guano Co., a corporation of which petitioners’ father was a large stockholder. The subscriptions of these petitioners were made by them in part individually and in part in partnership.

      The petitioners were the principal owners of stock of the Securo Corporation. In the latter part of February or early part of March, 1920, it occurred to them that whatever might be derived from the aforesaid pool would be more beneficial to the Securo Corporation than to the partnership. They therefore decided to have the Securo Corporation receive the amounts.
    On May 8, 1920, the partnership received a check for $13,580 as a distributive share from the pool, and on October 1, 1920, a second check for $19,000. These checks were banked by the partnership and credits were made upon the books of the Securo Corporation of the amounts. In each case the journal of the Securo Corporation contained an entry debiting Levering & Levering and crediting miscellaneous merchandise. The partnership did not include the amount of $32,580 in the income shown on its partnership return for 1920, and neither of the partners included any part thereof in his individual return. The Commissioner added to each partner’s income his distributive share of the amount, and upon this basis determined the deficiencies in question.
   OPINION.

Stekniiagen:

The only evidence is the testimony of one of the petitioners. He testified to all of the foregoing facts. The contention of petitioners’ counsel is that the profit from the pool had been assigned to the Securo Corporation and was not income to the members of the partnership. The contention is clearly untenable. The partnership subscribed to the pool and undertook to pay the subscription if called upon. No payment was required. In 1920 a profit of $32,580 was realized from the transaction, and like any other profit it was within the partnership’s gross income. What they did with it thereafter does not make it otherwise. So far as this record shows there was no consideration for the credit to the Securo Corporation, and the transfer of the profit after receipt to that corporation does not affect the question.

Judgment will be entered for the Gom-missioner.


author: GREen:

text:
    Appeal of Boston Hide & Leather Co.
    Docket No. 5105.
    Decided November 26, 1926.
    On March 12, 1920, the petitioner filed what it designated as a “ tentative return,” which contained no statement of gross income, deductions, credits, or net income, but it did set forth the estimated total tax for the year 1919. At the same time it made a written request for an extension of time within which to file what it designated as a “ completed return.” Thereafter, on May 15, 1920, it filed its return in which was set forth gross income, deductions, credits, and its computation of net income. Held,, that the return filed May 15 was the return required hy law, and that the period of limitations prescribed in section 277, paragraph (a) (2) and paragraph (b), of the Revenue Act of 1924, commenced to run at the date of the filing of the completed return.

      Allison L. H. Newton, Esq., for the petitioner.

      John W. Fisher, Esq., for the Commissioner.
    The petitioner seeks a redetermination of a deficiency in income and profits taxes for the year 1919 in the amount of $2,900.81. The controversy between the parties is as to whether the statute of limitations commences to run with the filing of a tentative return accompanied by a request for an extension of time, or with the filing of the complete return. The pleadings raise the issue of the right of the petitioner to relief under sections 827 and 328 of the Revenue Act of 1918, but this issue was abandoned at the hearing.
    PINDINGS OP PACT.
    The petitioner is a corporation duly organized and operating under the laws of the Commonwealth of Massachusetts, with its principal place of business at Boston. On October 17,1922, it made an assignment of its assets for the benefit of creditors, to J. Butler Studley and Samuel L. Bailen. This proceeding is brought by the assignees.
    On March 12, 1920, the petitioner mailed the following letter to the collector of internal revenue at Boston:
    BOSTON HIDE & LEATHER CO.
    Incorporated
    207 Essex Street
    Boston 11, Mass. U. S. A.
    March 12, 1920.
    Mr. Andrew J. Oasey,
    Collector of Internal Revenue,
    Little Building, Boston, Mass.
    Dear Sir:
    The extension to May 15, 1920, for filing the completed income tax return for our company is requested in view of the fact that the officers of the company have been absent from the country, and in view of the complications in making out the return arising through the foreign business done by the company which makes it impossible for us to prepare the completed return by March 15, 1920.
    We send you, herewith, tentative return on form 1120 for the Boston Hide & Leather Company’s corporation income tax for the year 1919 on which the estimated tax is shown as $80,000.00. We also enclose check for one-quarter of this amount, $20,000.00, as the first payment due March 15, 1920.
    Respectfully,
    Boston Hide & Leatheb Co., Ino.
    AGM/EB (Signed) Alf G. Moseley, Treasurer.
    Enel.
    The tentative return which accompanied the letter was made out on Form 1120. Across the face of this form was written the words “tentative return.” It contained no report of gross income, deductions, credits, or net income. Eighty thousand dollars was shown as the estimated total tax for the year 1919.
    On April 9, 1920, the following letter granting the extension requested in petitioner’s letter of March 12 was mailed to the petitioner by Collector John J. Mitchell:
    TREASURY DEPARTMENT
    TDC
    Internal Revenue Service
    Office of the Collector, Third District of Mass.
    Boston Hide & Leather Co. 210 Essex Street, Boston, Mass.
    80 Boylston Street, Boston, Massachusetts.
    Serial No. 408349
    April 9, 1920.
    Sirs:
    EXTENSION or TIME FOR FILING CORPORATION RETURN, FORM 1120, FOR CALENDAR YEAR 1919.
    Pursuant to your request extension of time is hereby granted you until May 15th, 1920, to file your income tax return, Form 1120.
    You are hereby advised that interest will be charged you at the rate of six per cent per annum for the period from March 15th, to date of filing final return on any deficiency which may develop between the amount of the first installment as paid upon submission of your tentative return and the amount of the first installment properly due as determined upon submission of final return.
    IN ORDER THAT YOU MAY RECEIVE PROPER CREDIT UPON SUBMISSION OE YOUR PINAL RETURN FOR THE ESTIMATED ONE-QUARTER OF TAX DUE PAID BY YOU UPON SUBMISSION OP YOUR TENTATIVE RETURN THIS FORM MUST BE ATTACHED SECURELY TO THE FACE OF YOUR FINAL RETURN.
    Respectfully,
    John J. Mitcbell,
    #307a
    Collector.
    On May 15, 1920, the complete return showing a tax liability of $80,732.52 was filed by the petitioner in the'office of the collector in Boston.
    The deficiency letter was mailed to the petitioner on April 30,1925.
   OPINION.

GREen:

The facts in this proceeding are almost identical with those in the Appeal of the Dallas Brass & Copper Co., 3 B. T. A. 856. There we held that the filing of a tentative return similar to that filed by the petitioner in this proceeding did not constitute the filing of a return within the provisions of section 239 of the Revenue Act of 1918, which in part reads as follows:

That every corporation subject to taxation under this title and every personal service corporation shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer.

In the opinion in that appeal we said:

The return required by the statute is a document prepared in such manner as to set forth the information called for in the above quotation from section 289 of the Revenue Act of 1918. The form filed by the taxpayer on March 12, 1919, contained none of the information required by section 239, above quoted. We must, therefore, treat this tentative return only as a request for an extension of time within which to file the return, accompanied by a statement that the taxpayer complied with the Commissioner’s requirements of making a payment of one-fourth of the amount of tax estimated to be due, and that this taxpayer, having availed itself of the extension offered by the Commissioner to it and all other taxpayers in similar circumstances, can not now with any degree of propriety, claim that the simple form used by it, containing none of the information required by the statute, was a return which could start the running of the statute of limitations.

The time within which the assessment of income and profits taxes for the year 1919 must be made, or the deficiency letter mailed, is prescribed in paragraph (a) (2) and paragraph (b) of section 271 of the Revenue Act of 1924. These paragraphs are as follows:

Sec. 277. (a) * * *
(2) The amount of income, excess-profits, and -war-profits taxes imposed by the Act entitled “An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” approved August 5, 1909, the Act entitled “An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes,” approved October 3, 1913, the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, and by any such Act as amended, shall be assessed within five years after the return was filed, and no proceeding in court for the collection of such taxes shall be begun after the expiration of such period.
‡ ⅜ * * * * *
(b) The period within wh'eh an assessment is required to be made by subdivision (a) of this section in respect of any deficiency shall be extended (1) by 60 days if a notice of such deficiency has been mailed to the taxpayer under subdivision (a) of section 274 and no appeal has been filed with the Board of Tax Appeals, or, (2) if an appeal has been filed, then by the number of days between the date of the mailing of such notice and the date of the final decision by the Board.

The true return required by law was tiled by this petitioner on May 15, 1920; the deficiency letter was mailed on April 30, 1925, which is within the five-year period prescribed by the quoted portions of section 277 of the Revenue Act of 1924, and we therefore hold that the period of limitations prescribed in such section has not expired.

Judgment will be entered for the Commissioner.


author: Milliken:

text:
    T. F. Cross, Executor, Estate of Mollie Rice Cross, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4266.
    Decided November 26, 1926.

      Palmer Danaher, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    The taxes in controversy are estate taxes in the amount of $290, which the Commissioner has determined to be due from the estate of Mollie Rice Cross. The executor of the estate, in petition filed, avers that the Commissioner erroneously included in the gross estate of the decedent notes in the amount and value of $29,000.
    FINDINGS OF FACT.
    Mollie Rice Cross died testate on August 9,1923, being survived by three heirs-at-law, T. F. Cross and C. R. Cross, her sons, and Mollie F. Cross, a granddaughter. The last will and testament of the decedent was admitted to probate in Pulaski County, Arkansas, and provided as follows:
    I, Mollie Rice Cross, of the City of Little Rock, Arkansas, being of sound mind, memory and understanding, do hereby make, publish and declare this to be my last will and testament, hereby revoking and making void all other wills and testaments by me at any time heretofore made. I give, devise and bequeath:—
    First: — To Mr. Joe Nichols, of the Simmons National Bank of Pine Bluff, Arkansas, in trust as hereinafter set out, the last maturing promissory note in the principal sum of Ten Thousand ($10,000.00) Dollars of the approximately Forty Thousand Dollars worth of notes now owned by me and in the said Simmons National Bank for collection, the said note to be held by the said Joe Nichols, as trustee and in trust for my beloved granddaughter, Mollio Flournoy Cross, daughter of my son C. R. Cross, and the said note and the proceeds thereof and the interest thereon shall constitute a trust fund to be collected by the said trustee and invested and reinvested by him in merchantable first mortgage real estate notes until my said granddaughter shall reach the age of eighteen years, when the said fund shall be delivered to her and become hers absolutely, but in case my said granddaughter dies before reaching the age of eighteen years, then and in that event the said trust fund shall be delivered to and vest in my son T. F. Cross and Ms heirs;

      Second: — To my beloved son, T. F. Gross, for and during bis life, tbe two plantations known as tbe Camp Ground and tbe Pendleton Places, with remainder at bis death to bis wife and children surviving him, share and share alike, and in the event be leaves no wife and no children surviving him then to my said granddaughter, Mollie Flournoy Gross, and her heirs;
    Third : — To my beloved son, T. F. Gross, in addition to the above and absolutely and in his own right, my home in the City of Little Rock, being Lots Thirteen and Fourteen of Block Thirteen, of Hillcrest Addition to the City of Little Rock, the household goods, my automobile, and the things in and about the house, and also the rest of the notes above mentioned and all money in bank and also all the rest and residue of my property real, personal and mixed, of whatsoever nature and wheresoever situate;
    Since I deem that my beloved son, O. R. Gross, is well provided for by his father’s having conveyed to him a large estate, X make no bequest or devise to him.
    I hereby appoint my said son T. F. Gross as the executor of this my last will and testament and request that he be required to give no bond, and I grant to him, as such executor full power of sale and conversion at public or private sale, of any and all my real and personal property not specifically bequeathed or devised herein.
    The gross estate included real estate, demand notes, cash in bank, and other miscellaneous property. The gross estate consisted of the following notes, in the total sum of $29,000, of C. R. Cross, son of the decedent: Note for $2,000, dated December 11, 1920, payable on demand; note for $10,000, dated December IS, 1921, with credit of $8,000; note for $10,000, dated December 15, 1922; note for $10,000, dated December 15, 1923; and note for $5,000, dated December 15, 1925. All of the aforesaid notes bore interest at 8 per cent per annum from maturity and were secured by a vendor’s lien on “ Sherrod Place,” Desha County, Arkansas.
    A suit was brought on January 7, 1924, in the Chancery Court of Desha County, Arkansas, styled O. B. Cross, Plaintiff, v. T. F. Cross, as Executor of the Estate of Mollie Bice Cross, Deceased, Defendant, to have the aforementioned notes canceled as a cloud upon the title to the lands of the plaintiff and the vendor’s lien securing their payment canceled and set aside. A decree was entered by the Chancery Court of Desha County, Arkansas, ordering the notes canceled and the vendor’s lien on the lands of the plaintiff canceled, set aside and held for naught, and fully satisfied.
    In the Federal estate-tax return filed by the executor of the estate, it is stated, in referring to the aforementioned notes, that “the notes were ordered canceled by decree of Desha County Chancery Court in the case of C. B. Cross v. T. F. Cross et al., upon testimony taken, but no active defense made.”
    A note of C. R. Cross for $10,000, dated March 1, 1921, due March 15, 1924, with interest from maturity at 8 per cent, was reported by the executor on the Federal estate-tax return as having a value of $8,933.33, and there is no dispute between the petitioner and the Commissioner as to the value for Federal tax purposes of the note.
   OPINION.

Milliken:

We are asked to decide as a fact that the notes, in the face amount of $29,000, of C. R. Cross, son of the decedent, were worthless and of no value as of the date of death of the decedent, and accordingly that no value may be ascribed to them for the purpose of determining the value of the gross estate for Federal estate-tax purposes. No testimony was offered by either the petitioner or the Commissioner, and the only evidence submitted was a certified copy of the decree of the Chancery Court of Desha County, Arkansas, by the petitioner, and the Federal estate-tax return, by the Commissioner. We are without information as to the facts upon which the court decree was based. Perchance, it may have been based upon the fact that a partial or complete settlement had been made on the notes in question, or the heirs at law may have entered into a composition agreement, or events may have transpired between the date of death of the decedent and the date of the decree that vitally affected the value of the notes — but as to all these matters we can only surmise. The decree standing alone does not supply us with evidence upon which the determination of the Commissioner may be set aside.

It should also be observed that one of the notes of C. R. Cross, in the amount of $8,933.33, had that value for Federal estate-tax purposes, and about this there is no disagreement between the parties.

Judgment will be entered for the Commissioner.


author: Green:

text:
    Appeal of Samuel E. Prather.
    Docket No. 2516.
    Decided November 26, 1926.
    The petitioner created a trust by a conveyance of a life estate in certain real property. Subsequently he expended certain moneys in the construction of a levee upon the premises, the life estate in which he had conveyed, and deducted the amount of such expenditure on his return .for that year. The Commissioner disallowed the deduction and determined that the expenditure should be amortized over the petitioner’s expectancy as a life tenant. Held, that the expenditure was an additional gift to the trust and that the petitioner is entitled to no deduction by reason thereof.

      W. Frank Gibbs, Esq., for the Commissioner..
    The petitioner has appealed from the determination of a deficiency in income tax for the year 1919 in the sum of $840.32, and in his petition alleges the following errors:
    (1) The Commissioner erred in transferring from taxable income of Ida Prather, wife of the petitioner., to the taxable income of the petitioner the sum of $2,800.
    (2) The Commissioner erred in disallowing depreciation claimed in the return of the petitioner for the year 1919.
    (3) The Commissioner erred in amortizing the petitioner’s claim for improvements made upon the property in which he held a life interest.
    FINDINGS OF FACT.
    For many years prior to March 1, 1906, the petitioner held a life estate, in certain Illinois, farm lands. The remainder of the estate was vested in his children. On that date he created a trust by .conveying to a trustee certain properties, including the life estate above referred to. By the terms, of the trust there was to be paid to him annually a stipulated sum of money, the amount of which is not disclosed by the record, and to his wife, Ida Prather, the sum of $2,000 per annum.
    In the year 1919 the trustee paid to Ida Prather the sum of $2,800, which amount was reported by her as separate income. The Commissioner concluded that this amount was income to the husband and added it to his gross income for such year.
    In 1918 the petitioner expended $3,865.96 in the construction of a levee on the lands in which he had previously had a life estate and which had been conveyed to the trustee, and claimed such amount as a deduction in his return for that year. This deduction was denied by the Commissioner and the amount thereof amortized over the petitioner’s expectancy as a life tenant. In the recomputation of the petitioner’s income for the year 1919, the Commissioner deducted the sum of $441.67 by reason of the expenditures so amortized.
   OPINION.

Green:

The first allegation of error relates to the inclusion in the petitioner’s income of the sum of $2,800 paid by the trustee to the wife of the petitioner. In his answer the Commissioner concedes that of this amount $2,000 was the separate income of the wife and that it should not have been included in the income of the husband. As to the remaining $800, there is neither evidence nor admission, and we therefore hold that the petitioner’s net income should be reduced by the sum of $2,000.

The second allegation of error relates to the depreciation disallowed. No evidence having been introduced, and there being no admissions in the pleadings as to this allegation of error, we must approve the action of the Commissioner in this regard.

There remain only the questions presented by the third allegation of error. The petitioner, by certain conveyances, created a trust. Among the properties conveyed to the trustee was his life estate in certain lands. After the creation of the trust and the conveyance above referred to, the petitioner expended the sum of $3,865.96 in the construction of a levee upon the lands in which he had held a life estate. The petitioner on his tax return for 1918 deducted as an expense the amount expended by him in the construction of the levee. This deduction was disallowed by the Commissioner upon the theory that the total expenditure should be amortized over the petitioner’s expectancy as a life tenant. In his answer the Commissioner concedes that his action in this regard was in error and contends that the petitioner is entitled to no deduction whatever by reason of the expenditure.

If we are correct in our understanding of the facts in this proceeding, both parties have misconceived the situation, for both are apparently proceeding upon the theory that the expenditure was made by the petitioner upon properties in which he held a life estate. It seems to us that the petitioner made the expenditure as a gift to the trust. He had prior thereto definitely parted with any interest which he had as a life tenant and his only interest in the property was that of cestui que trust. We conclude that the expenditure was by way of enlargement of the trust res or an additional contribution to the trust, and that therefore the petitioner is entitled to no deduction by reason thereof.

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


author: Littleton:

text:
    W. C. Miles Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 3439, 9559.
    Decided November 26, 1926.

      Edmund Burke, Esq., and John G. Jaeger, Esq., for the petitioner.

      Arthur II. Murray, Esq., for the respondent.
   Littleton:

Proceeding Docket No. 9559 involves a deficiency in income and profits tax in the amount of $6,62< .14 for the fiscal year ending January 31, 1920. This deficiency ivas assessed February, 1925, and on November 4, 1925, the Commissioner denied petitioner’s claim for the abatement of $1,911.24, the amount here in controversy.

Proceeding Docket No. 3439 relates to a deficiency of $6,506.02 for the fiscal year ending January 31, 1922, of which amount $3,225.27 is in controversy.

Petitioner claims that the inventory used by the Commissioner represented neither cost nor cost or market, whichever was lower, but was purely arbitrary, and that the Commissioner should have allowed it a deduction for exhaustion, wear and tear of machinery of 10 per cent instead of 8 per cent, and a deduction for exhaustion, wear and tear on automobile trucks at the rate of 20 per cent instead of 10 per cent per annum.

FINDINGS OF FACT.

The petitioner is a Massachusetts corporation engaged in the manufacture of interior finish, house finish, and office fixtures, with principal office at Bedford. All of the stock of the corporation was owned by W. C. Miles, who has been engaged in this business for forty years.

During the years from 1919 to 1922, inclusive, the corporation was in financial difficulties, which necessitated its borrowing sums of money from time to time during this period upon notes endorsed by its president, W. C. Miles. The banks required annual financial statements to be submitted and these were prepared by Miles and included the valuation of lumber on hand. The corporation kept an invoice book in which were pasted the original invoices showing the cost of all lumber purchased. When making these statements to the banks at the end of each year, Miles took a detailed inventory of the different grades of lumber and the number of feet of each grade. He then priced the lumber at an arbitrary figure per foot, giving little or no consideration as to whether the price represented original cost, or replacement cost or market. These inventories were written and the amounts thereof entered in a separate book kept for that purpose. After taking inventories at January 31, 1919, 1920, 1921, and 1922, Miles arbitrarily reduced the total of the inventory for the fiscal year ending January 31, 1920, in the amount of $2,500, and the inventory at January 31, 1921, in the amount of $5,500, before submitting them to the bank.

The total of the inventories for the years ending January 31, 1919, to 1922, inclusive, the amounts of the arbitrary reduction, and the value thereof as entered upon the inventory book follow:

During this period Miles was having difficulty in warding off insolvency proceedings, and as the company’s operations were not profitable he gave no consideration to the matter of taxation when pricing the inventories. When the income-tax returns of the company for each of the years were prepared by the bookkeeper, they showed no tax liability and the inventories as priced for bank statements were included in the returns without further consideration by Miles as todash whether the values represented cost, or cost or market, whichever was lower. Shortly after 1922 the Commissioner’s field agent investigated the company’s records. He disallowed certain deductions claimed, reduced the allowance claimed for exhaustion, wear and tear on machinery and automobiles, and made other adjustments not here in controversy, which resulted in a tax in the amounts hereinbefore stated. Whereupon, Miles took the original daily inventories for each of the years and proceeded in a careful and painstaking manner accurately to price the items listed thereon at cost, or cost or market, whichever was the lower. He had the original invoices showing cost and he was thoroughly familiar with the replacement cost or market of lumber at the end of each year. The inventories thus priced showed a decrease in the inventories originally taken of $1,399.39 for the fiscal year ending January 31, 1919, and $4,949.24 for the fiscal year ending January 31, 1920, an increase of $4,340.91 for the fiscal year ending January 31, 1921, and a decrease of $3,233.83 for the fiscal year ending January 31, 1922. The agent refused to accept these inventories and decreased the inventories originally taken and shown in the returns for the taxable years ending January 31, 1920 and 1922, here in question, in an arbitrary amount less than the amount at which petitioner priced them upon the basis of cost, or cost or market, whichever was lower. This action on the part of the agent was approved by the • Commissioner in his determination of the tax in controversy.

The petitioner’s inventories upon the basis of cost, or cost or market, whichever was the lower, for each of the years ending January 31, 1919, to 1922, inclusive, were as follows:

Jan. 31, 1919. $15, 952. 06
Jan. 31, 1920. 28,191.90
Jan. 31, 1921. 38,292.80
Jan. 31, 1922 27, 412. 75

At the beginning of the fiscal year ending January 31, 1920, petitioner owned and used in its business wood-working machinery costing $14,624.22, and during the year additions were made costing $362.69. It also had during this year certain automobile trucks used in its business which cost $4,085.25. At the beginning of the fiscal year ending January 31, 1922, petitioner owned and used in its business machinery costing $16,929.35 and automobile trucks costing $4,085.25, as stated above.

The probable useful life of the machinery was 10 years, and a reasonable allowance for exhaustion, wear and tear during the taxable years was 10 per cent of the cost thereof per annum. The average useful life of the automobile trucks which were used for hauling lumber and in delivering petitioner’s products was 5 years, and a reasonable allowance for exhaustion, wear and tear was 20 per cent of the cost thereof per annum.

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


text:
    John S. Gullborg, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5173.
    Decided November 26, 1926.
    The evidence does not establish that petitioner made a bona fide transfer of the deferred purchase-price installments for property-sold by him.

      Carlyle N. Keys, Esq., for the petitioner.

      C. H. Curl, Esq., for the respondent.
    The Commissioner determined deficiencies in income tax for the calendar years 1920 and 1921, in the amounts of $6,430.61 and $2,106.30, respectively. The notice of the deficiencies for these years mailed to the petitioner sets forth the Commissioner’s determination of no deficiency for the calendar year 1919.
    Petitioner claims that no part of a profit derived from a sale by him on December 29, 1919, of his interest in certain property was income to him, for the reason that immediately after and on the date of the sale the agreement of the purchaser to pay for the property was assigned by petitioner to his wife.
    FINDINGS OF FACT.
    Petitioner is a resident and citizen of Chicago, Ill. On December 29, 1919, he was the owner of an undivided interest in certain property known as the “Lubricator Division” of the Alemite Die-Casting & Manufacturing Co., an Illinois corporation. On that date he sold his interest in this property for $81,624.96 to The Bassick Company, a Connecticut corporation. The written agreement between the parties at the time of the sale was in part as follows:
    This Agreement, Made this 29 day of December, A. D. 1919, by John S. Guixborg, C. M. Hedman, H. It. Hedman, A. V. Gullbokg and 1<\ E. Johnson, all of Chicago, Illinois, parties of the first part, and The Bassick Company, a corporation duly organized under the laws of the State of Connecticut, party of the second part,
    WITNESSETH:
    * * * * * * *
    Whereas, the first parties are desirous of selling all of their interest in and to said property and are willing individually and severally to enter into a restrictive covenant not to engage dhrectly or indirectly, in the lubricating business, with limitations as to time and space as hereinafter more fully set forth; and
    Whereas, the second party is willing to purchase the interest of the first parties in and to said proiJerty with the protection afforded by said restrictive covenant, upon the terms and conditions hereafter stated;
    Now Therefore, in consideration of the sum of One Dollar ($1.00) and other good and valuable consideration, and in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows:
    First : The first parties have granted, bargained, sold and delivered, and by these presents do grant, bargain, sell and deliver to said Bassick Company all of their right, title and interest in and to that property formerly owned by the Alemite Die-Casting & Mfg. Co. and generally known and described by the parties as “ the lubricator division ” of said Company, including:—
    (a) The existing lease to the premises at 361 West Superior Street, Chicago, which Bassick Company agrees to assume, and all of the machinery and equipment, both office and factory, at present therein.
    (b) The good will and all patent and trade mark rights, both domestic and foreign, and including the sole right to use the name “Alemite ” in the conduct of a lubricator business, together with the rights and obligations under any contracts or agreements or in any way relating thereto.
    (e) All existing contracts relating to said property, including both rights and obligations thereunder.
    (d) All inventory materials, raw, in process, finished and on the floor, at the close of business October 28, 1919.
    (e) Any and all die casting dies or special tools, fixtures and dies now used in the manufacture of lubricating devices at 341 West Chicago Avenue, Chicago, Illinois.
    The second paragraph provided that the first parties should not at any time prior to January 2, 1923, engage in the business of manufacturing or selling any lubricating device similar to the Alemite Lubricator, directly or indirectly, within the United States, except in the counties of New Mexica and Massac in the State of Illinois.
    Third: The Bassick Company agrees to pay to the first parties for their use in severalty in the proportions hereinafter stated, for said property and for the continuing observance by the first parties severally of the restrictive covenant heretofore mentioned, the sum of Two Hundred and Fifty Thousand Dollars ($250,000.00) in manner following: Sixty-two Thousand, Five Hundred Dollars ($62,500.00) in cash upon the execution and delivery of this agreement, and
    $20,406.24 on the 1st day of May, A. D. 1920,
    $42,093. 76 on the 2nd day of January, A. D. 1921,
    $20,406.24 on the 1st day of May, A. D. 1921,
    $42, 093.76 on the 2nd day of January, A. D. 1922,
    $20,406.24 on the 1st day of May, A. D. 1922,
    $42, 093.76 on the 2nd day of January, A. D. 1923.
    All of said payments shall be made to Foreman Bros. Banting Company, Chicago, Illinois, for the sole use and benefit of the first parties. Upon receiving the said payment the said Banking Company shall distribute the same to the first parties as follows:
    To John S. Gullborg on December 29, 1919_ $8,162. 50
    “ “ “ “ “ January 2, 1920_ 12,243.74
    “ “ “ “ “ May 1, 1920_ 20,406.24
    “ “ “ “ “ “ 1, 1921_ 20,406.24
    “ “ “ “ “ “ 1, 1922_ 20,406.24
    $81, 624. 96
    Here follows a tabulation similar to the above relating to the amounts to be paid to the other four individuals mentioned in the agreement and a provision that Foreman Bros. Banking Co. was acting for the parties of the first part and was to be compensated by them, after which the agreement continued:
    To secure the payment of said deferred installments, The Bassick Company has this day deposited with Foreman Bros. Banking Company the following securities as collateral: $39,000 U. S. Liberty Bonds and 150 shares of the capital stock of American Telephone & Telegraph Co. (Certificates G41536 for 100 shares and P53243 for 50 shares) ; 25 shares common capital stock of Union Pacific Railroad Co. (Certificate A203139) ; 45 shares capital stock of the Southern Pacific Co. (Certificate F104220) ; 170 shares of common capital stock of U. S. Steel Corporation (Certificates F667279 for 70 shares and G719502 for 100 shares, together with Powers of Attorney to transfer said stocks. The Foreman Bros. Banking Company so long as The Bassick Company is not in default, is to forward to it regularly and without charge coupons on said bonds as they become due.
    Then followed a provision that, upon default in the payment of any installment or installments, Foreman Bros. Banking Co. should give notice by mail to all parties fifteen days before it should take any further action under the contract, and that if the second party was still in default at the termination of such notice Foreman Bros. Banking Co. was authorized to sell so many of the securities as might be necessary to satisfy the defaulted installments with interest, together with all costs and charges, including attorney’s fees. The agreement then further declared:

      And to further secure the payment of said installments, The Bassick Company does hereby authorize irrevocably any attorney of any court of record to appear for it in such Court during term time or vacation, at any time after default and expiration of said fifteen days notice, and confess a judgment without process against it in favor of the first parties, or any one or more of them, for such amount as may appear to be unpaid on this contract, together with interest, costs and reasonable attorney’s fees on such amount; to waive and release all errors which may intervene in such proceedings and consent to immediate execution upon such judgment, hereby ratifying and confirming all that said attorney may do by virtue hereof.
    Installments past due shall bear interest at the rate of seven (7) per cent per annum until paid.
    No collateral securities placed in the hands of said Banking Company shall be delivered to Bassick Company until all payments under this contract are fully made, except that the Banking Company may in its discretion allow the substitution or withdrawal of securities.
    * * * * * * *
    This agreement was signed by the petitioner and the other individuals mentioned, as parties of the first part, and The Bassick Company, as party of the second part, on December 29, 1919.
    When the sale had been made and the aforementioned agreement had been signed, petitioner and his attorney discussed the matter of Federal income tax. The attorney stated that in his opinion the sale Avas not taxable, but advised petitioner to assign the agreement to his wife in order to save any income tax which might result from a holding that there had been a taxable gain. Pursuant to this advice, and because of the often expressed wish of his wife that she should have separate funds to invest, petitioner, in the evening of the day on which the sale was made, executed and delivered to Agda H. Gullborg, his wife, the following agreement:
    For value received I hereby assign all my right, title and interest in the within contract with the Bassick Mfg. Company to Agda H. Gullborg and covenant to observe any covenants that will entitle the assignee herein to receive the amounts set forth.
    John S. Gullborg (seal)
    Dated at Chicago,
    this 29th day of December 1919.
    All payments under the agreement were made by The Bassick Company to Foreman Bros. Banking Co. and by the latter to the petitioner.
    The first two payments of $8,162.50 and $12,243.74 were deposited by the petitioner in his individual bank account. Thereafter, he drew checks for the amounts in favor of his wife and she deposited the same in a bank account opened by her in her own name. On or shortly before May 1,1920, the date of the third payment, petitioner, after discussing the matter with his wife, and at her suggestion, opened a .joint bank account in the name of the two of them, and the payments thereafter received by the petitioner were deposited by him in this account. At the time of the sale hereinbefore mentioned petitioner was indebted to the Alemite Die-Casting & Manufacturing Co., a corporation in which he owned a one-fifth interest, in the amount of $28,000. With the consent of his wife he used $14,000 of the proceeds of the sale in partial liquidation of that indebtedness.
    Out of the proceeds of the sale received during 1920 and 1921 petitioner’s wife expended $8,000 for certain stock of the Unity Oil & Gas Co. of Muncie, Indiana, $5,000 of which was taken in her name and $1,500 in the name of each of her two children. A portion of the amounts received was used to satisfy a mortgage on the home, the title to which was in the name of petitioner and his wife; a portion was used to purchase land in Michigan, the title to which was taken in the name of petitioner and his wife, and to erect thereon a summer home. Approximately $7,000 was used to purchase certain real estate located in Chicago, the title to which was taken in the name of petitioner and his wife. Certain real estate in Florida was purchased for $15,000 and title thereto was taken in the name of Mrs. Gullborg. Certain undisclosed sums were used in refurnishing the home and paying the tuition and expenses of a daughter in college.
    Mrs. Gullborg and the petitioner always conferred together before making any payments out of money received under the agreement. The petitioner made suggestions as to the advisability of contemplated purchases and no expenditures or investments were made without his consent first being obtained.
   opinion.

Littleton:

The petitioner reported no income from sale of his interest in certain property to The Bassick Company on December 29, 1919, and claims that he is not subject to tax thereon for the reason that he assigned his rights under the agreement to his wife. The Commissioner apparently held that the transaction between the petitioner and others, and The Bassick Company, was an installment sale and determined the petitioner’s gain in the taxable years 1920 and 1921 upon that basis. The Commissioner insisted that the purported assignment by petitioner to his wife of his right, title, and interest under the agreement with The Bassick Company was only a pretended one and that it was not bona -fide.

The Board is of the opinion that the Commissioner’s determination was correct. We believe the petitioner did not relinquish his right, title, and interest to the proceeds of the sale. Every installment was paid to and received by him. For a period of five months he deposited the payments in his individual bank account. Thereafter, as he received payments, they were deposited by him in a joint bank account which he had opened in the name of himself and his wife. A large amount of the proceeds of the sale was used by him to discharge and liquidate his personal indebtedness. No portion of the money was expended or invested without his advice and consent. With the two exceptions of the Florida real estate and the Unity Oil & Gas Co. stock, all expenditures and investments were for the joint use and benefit of the petitioner and his wife. The record does not specifically show, but the evidence would indicate, that the petitioner in some cases disbursed the money. The proceeds of the sale were so held by the petitioner that they were at all times subject to his use and disposition. The expenditures and investments indicated nothing more than that, as a prudent husband and father, the petitioner was handling the fruits of his labor in what he regarded as a wise and judicious manner. With the exception of the property sold on December 29, 1919, petitioner’s only assets consisted of $10,000 par value of capital stock of the Alemite Die-Casting & Mfg. Co. and a residence of the approximate value of $18,000, owned by himself and his wife jointly.

We are of opinion from the entire record that the petitioner did not by the assignment part absolutely with his right, title, and interest in the unpaid installments provided in the sales agreement, and that the Commissioner correctly held that whatever gain resulted from the payments made to petitioner during the taxable years was income to him.

Judgment will be entered, for the Commissioner.


author: Phillips:

text:
    Appeal of Dickerman & Englis, Inc.
    Docket No. 4928.
    Decided November 26, 1926.
    1. Under the provisions oí the Revenue Act of 1926, the Board has jurisdiction to determine an overpayment of tax in respect of a taxable year for which the Commissioner has determined a deficiency, whether the proceeding before the Board is filed prior to or subsequent to the passage of the Revenue Act of 1926.
    2. The Board has no jurisdiction to determine whether such an overpayment of tax should be credited or refunded to the taxpayer or to determine whether credit or refund is barred by the period of limitation provided by statute.

      Maxwell Goldstein, Esq., for the petitioner.

      George G. Witter, Esq., for the Commissioner.
   Phillips:

Under date of July 28,1926, the Board promulgated its decision herein, wherein it was held that the taxpayer was entitled to classification as a personal service corporation. 4 B. T. A. 447. On October 4, 1926, pursuant to the decision of the Board, the appeál came on for redetermination of the deficiency under Rule 50 of the Board, whereupon counsel for the Commissioner admitted of record that under the decision of the Board there was no deficiency in income and profits taxes for 1920 and that an assessment of income and profits taxes for 1920 in the amount of $9,397.77 had been paid. He then offered to introduce evidence to show that, by reason of the expiration of the statutory period allowed therefor, no refund or credit of such overpayment could be made. The presiding Member declined to receive such evidence, upon the ground that the Board had jurisdiction to determine whether there had been any overpayment of tax but had no jurisdiction to determine whether credit or refund of any such overpayment was barred by the statute, and an order was entered determining that there is no deficiency for 1920 and that the taxpayer has made an overpayment of tax in respect of such year in the amount of $9,397.77.

The Commissioner now moves to vacate said order upon three grounds. He first asks that the order be vacated and that an order be entered determining that there is no deficiency for 1920 and making no finding as to any overpayment of tax for that year, upon the ground that the Board has no jurisdiction to determine an overpayment of tax in an appeal heard and submitted prior to the passage of the Revenue Act of 1926. Section 1000 of the Revenue Act of 1926 provides:

Sec. 1000. Title IX of the Revenue Act of 1924 is amended to read as follows:
*******
“ Sec. 904. The Board and its divisions shall have such jurisdiction as is conferred on them by Title II and Title III of the Revenue Act of 1926 or by subsequent laws. * * * ”

Section 284 (e) of the Revenue Act of 1926, under the subtitle “ Credits and Refunds,” provides:

(e) If the Board finds that there is no deficiency and further finds that the taxpayer has made an overpayment of tax in respect of the taxable year in respect of which the Commissioner determined the deficiency, the Board shall have jurisdiction to determine the amount of such overpayment * * *.

In view of the express provisions of the law, it seems apparent that, whether the appeal was filed before or after the passage of the Revenue Act of 1926, the only jurisdiction the Board now has is that conferred by the Revenue Act of 1926 or subsequent acts, and that the 1926 Act expressly grants jurisdiction to determine the amount of any overpayment in tax for the year in question. The first motion set out by the Commissioner in his application must be denied.

In the event the Board denies his first motion, the Commissioner moves that the order entered herein be vacated and that an order be entered determining that there is no deficiency in tax for the year 1920, finding that the taxpayer made an overpayment of tax for said year in the sum of $9,397.77, and further determining that the refund of said overpayment is barred by the statute of limitations; and he further offers to introduce evidence that under the provisions of the Revenue Act of 1926 the period of the statute of limitations for the refund of any tax paid by the taxpayer for 1920 has expired.

A portion of section 284 (e) has been quoted above. The entire subsection reads as follows :

(e) If the Board finds that there is no deficiency and further finds that the taxpayer has made an overpayment of tax in respect of the taxable year in respect of which the Commissioner determined the deficiency, the Board shall have jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Board has become final, be credited or refunded to the taxpayer as provided in subdivision (a). Such refund or credit shall be made either (1) if claim therefor was filed within the period of limitation provided for in subdivision (b) or (g), or (2) if the petition was filed with the Board within four years after the tax was paid, or, in the case of a tax imposed by this Act, within three years after the tax was paid.

It would seem unnecessary to point out the distinction between a determination that the taxpayer has made an overpayment of tax and a determination that the taxpayer is entitled to a credit or to a refund. The statute grants the Board jurisdicion to determine that the taxpayer has made an overpayment of tax in respect of the taxable year for which the Commissioner determined the deficiency, and then, so far as jurisdiction of the Board is concerned, becomes silent. The remainder of the provision is administrative, directing as it does that such overpayment shall be credited or refunded under certain circumstances. It gives the Board no jurisdiction to determine whether such circumstances exist.

The provisions of section 284 of the Act set out in some detail a comprehensive scheme for the credit or refund of overpayments. After a careful examination, we can find no expression of any intention that the Board shall determine whether an overpayment is to be credited or refunded or that credit or refund is barred by the statute. It appears, on the contrary, that other provisions of the statute make it impossible for the Board to determine this question. Before any determination can be made of the application of the overpayment, it becomes necessary to determine whether there are any income or profits taxes due from the taxpayer. Section 284(a), Revenue Act of 1926. Section 274(g) of the same Act provides in effect that the Board shall have no jurisdiction to determine whether or not the tax for any taxable year other than that before it has been overpaid or underpaid. In view of this provision, it would be impossible for the Board to determine whether an overpayment should be credited or refunded.

There is a further provision of the Revenue Act of 1926 which leads us to the same result, for in section 284(d) the statute saves to the taxpayer the right to file a claim for credit or refund or to institute suit for the recovery of such overpayment. This is one of the few instances where the taxpayer, having elected after the passage of the Revenue Act of 1926 to proceed before the Board after the determination of a deficiency, has the right to initiate a proceeding in the courts.

Furthermore, it will be noted that the jurisdiction of the Board to determine whether the statute has run on the assessment or collection of a deficiency is expressly granted. Section 906(e), Revenue Act of 1924, as amended. There is no similar provision with respect to overpayments. It seems clear to us that the duty of the Board is to determine the amount of any overpayment, if possible from the record, and that when this has been determined the jurisdiction ceases. We therefore dismiss the second motion of the Commissioner.

The Commissioner further moves that, in the event the Board denies the first two motions, the Board enter an order determining that there is no deficiency in tax for the year 1920, finding that the taxpayer made an overpayment of tax for the said year in the amount of $9,397.77, and further determining that the Board is without jurisdiction to pass upon the question of whether or not the refund of said overpayment is barred by the statute of limitations. While it seems apparent to us that the Board has no jurisdiction to determine whether an overpayment should be credited or refunded, or whether the statute has run on a credit or refund, it appears that the order entered was strictly in conformity with, and indeed followed, the precise phraseology of the law. The record of the hearing before the Board, where it was expressly stated that the Board was without jurisdiction to pass upon the question, is available to the parties, and it should be clear from this record that, in determining the amount of the overpayment, the Board did not and does not purport to determine what disposition should be made of such overpayment. This is a matter for further proceedings, and for the Board in its final order or decision to attempt to state what jurisdiction it lacks would be, to say the least, surplusage. For the reasons stated the order dated October 4, 1926, is affirmed by the Board and the motion of the Commissioner is denied.

Order will be entered accordingly.