author: Trammell:

text:
    Estate of P. A. Chapman, J. O. Chapman, Heir at Law and Agent, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9566.
    Promulgated October 29, 1927.
    Where necessity did not exist for an administration upon an estate, attorney’s fees paid by one of the heirs for legal assistance and amounts retained as commissions for his services in connection with the distribution of the assets, are not allowable deductions from the gross estate in determining the net estate under the provisions of section 403 (a) (1) of the Revenue Act of 1921.

      Albert A. J ones, Esq., for the petitioner.

      R. J. Copes, Esq., and L. >S. Pendleton, Esq., for the respondent.
    This appeal involves a deficiency in estate taxes in the amount of $3,375. The deficiency arises on account of the action of the Commissioner in disallowing as a deduction the amount of $25,000 claimed as administration expenses and executor’s commissions.
    In the deficiency notice the Commissioner allowed one-half of the amount claimed upon the ground that the estate was community property and only one-half of the amount was included in the gross estate. In his answer the respondent avers that it was error to allow any part of the amount claimed as a deduction as executor’s commissions and attorney’s fees and that the deficiency should be increased.
    FINDINGS OF FACT.
    On February 16, 1924, P. A. Chapman, a resident of Texas, died intestate and left him surviving his widow and eight children, all of whom were sui juris. At the time of his death the decedent and his wife were the owners of a community estate consisting of real estate and personal property of a value in excess of $4,000,000. Under the laws of Texas this community estate, at the decedent’s death, passed one-half to the wife and one-half to the children. The estate was not administered under the Texas statutes.
    After the death of decedent one of his children, a son, acting for himself and as agent for all the other persons to whom the estate passed, took charge of the estate pending distribution and for the purpose of making proper distribution of assets, and retained counsel to advise him in that regard. For the services thus rendered the attorney and the son were each paid $12,500 out of the corpus of the estate before distribution to the persons entitled thereto. In the return which the son as heir at law and agent filed on behalf of the estate for Federal estate-tax purposes, attorney’s fees in the amount of $12,500 and “ executor’s commissions ” in the amount of $12,500 were claimed as deductions as administration expenses. The respondent in computing the deficiency determined that the attorney’s fees claimed were an administration expense upon the entire community estate of the decedent and his wife and allowed one-half of same, $6,250, but disallowed the remainder as well as the whole of the account of the claim of executor’s commissions.
    Under the law of Texas, on the death of a decedent his estate passes to his widow and children without formal statutory or judicial administration. The Texas statute required that there must be a showing to the court of the necessity for an administration before the estate could be subjected to such a proceeding. The necessity did not exist in this case as there were no heirs of disability and no creditors, and it is conceded that had application for administration been made it would have been denied. The estate was settled through family administration in accordance with the recognized practice in the State of Texas.
   OPINION.

Trammell:

The question presented for decision is whether the amounts paid to the son and to the attorney, under the facts set forth above, are deductible as administration expenses from the gross estate in order to determine the net estate subject to Federal estate tax.

The applicable provisions of the Texas statutes bearing on this question are as follows:

Abt. 3235. (1869) (1817). In whom property vests upon death of testator or intestate.—
When a person dies, leaving a lawful will, all of his estate devised or bequeathed by such will shall vest immediately in the devisees or legatees; and all the estate of such person, not devised or bequeathed, shall vest immediately in his heirs at law, but all of such estate, whether devised or bequeathed or not, except such as may be exempted by law from the payment of debts, shall still be liable and subject in their hands to the payment of the debts of such testator or intestate; and, whenever a person dies intestate, all of his estate shall vest immediately in his heirs at law, but with the exceptions aforesaid shall still be liable and subject in their hands to the payment of the debts of the intestate; but, upon the issuance of letters testamentary or of administration upon any such estate, the executor or administrator shall have the right to the possession of the estate as it existed at the death of the testator or intestate, with the exception aforesaid; and it shall be the duty of such executor or administrator to recover possession of and hold such estate in trust to be disposed of in accordance with law. (Vol. 2, Vernon’s Sayles’ Tex. Stats., 1914.)
Abt. 3255. (1888) (1835) Application of letters of administration shall state:
1. The name of the deceased; that he is dead, and the time and place of his death, and that he died intestate.
2. The facts necessary to show that the court has jurisdiction of the estate.
3. The nature and probable value of the estate.
4. That a necessity exists for an administration upon such estate, setting forth the facts which show such necessity.
5. That the applicant is not disqualified by law to act as administrator. (Vol. 2, Vernon’s Sayles’ Tex. Stats., 1914.)

It is conceded by the petitioner that there was no necessity for administration of the estate under the Texas statutes and that if application for administration had been made showing the facts as they were, the court would have denied the application under section 3255. This is in accordance with the decisions of the Texas courts. In the case of Angier v. Jones (Tex.) 67 S. W. 449, the court said:

We are also of the opinion that the application should have been refused because it fails to show any necessity for an administration. The mere fact that there are debts due the estate of a deceased person does not authorize the appointment of an administrator, and incurring the expense of an administration. If there are no creditors of the ’estate, and the heirs of the decedent are known and are under no disability, no necessity for an administration is shown. The heirs in such case can sue and recover the debts, if it be necessary to bring suit for that purpose, and can divide the proceeds of the estate among themselves without the assistance of a probate court; and the appointment of an administrator to represent them is entirely unnecessary.

To the same effect see Hart v. Hart (Tex.) 170 S. W. 1071, 1. c. 1073.

The widow and the children became the absolute owners of the assets of the decedent at the time of his death. The estate, with respect to the management of Vhich the son and the attorney rendered services, was not at the time those services were rendered the decedent’s estate but was the estate of the widow and children. The pertinent portion of section 403 of the Revenue Act of 1921 is as follows:

Seo. 403. That for the purpose of the tax the value of the net estate shall be determined—
(a) In the ease of a resident, by deducting from the value of the gross estate—
(1) Such amounts for * * * administration expenses, * * * as are allowed 6y the laws of the jurisdiction, whether within or without the United States, under which the estate is 6eing administered. * * * (italics ours.)

Under section 403 (a) only such administration expenses as are allowed by the laws of the jurisdiction are allowable as deductions from the gross estate. In this case the laws of Texas, as construed by the courts of that State, do not authorize the incurring of administration expenses. No necessity for such expenses was shown. The attorney’s fees and so-called executor’s commissions which petitioner claims as deductions representing administration expenses are, therefore, not allowable under the laws of the jurisdiction and are not deductible from the gross estate under section 403 (a) (1).

The views herein expressed are not in conflict with our opinions in the cases of James D. Bronson et al. Trustees, v. Commissioner, 7 B. T. A. 127, and the Estate of Jacob Voelbel v. Commissioner, 7 B. T. A. 276.

In the Bronson case, supra, certain individuals who had been named as executors and trustees in the will took possession of the assets of the estate, proceeded to the marshaling of the estate, valuing assets, determining, and paying debts, claims, taxes, etc., in the settlement of the estate prior to and preparatory to taking over and administering the property conveyed in trust, but they decided not to probate the will and did not obtain letters testamentary. These individuals allowed and paid themselves reasonable compensation of $10,000 each for their services in this connection, a total of $30,000. We held that the amounts were allowable as deductions under section 403 (a) (1) in determining the net estate. In that case the decedent was a resident of New York, the estate was administered under the laws of that State. We there said:

* * * Tbe laws of the State of New York, the jurisdiction under which this estate was administered, permit and make allowance for expenses of this character.
Section 285 of the New York Surrogate’s Court Act provides in part that—
“ On the settlement of the account of any executor, administrator, guardian or testamentary trustee, the surrogate must allow to him his just, reasonable and necessary expenses actually paid by him, * * * and in addition thereto the surrogate must allow to such executor, * * * for his services in such official capacity, and if there he more than one, apportion among them according to the services rendered by them respectively: * * * The value of any real or personal property, to be determined in such manner as the surrogate may direct, and the increment thereof, received, distributed or delivered, shall be considered as money in malting computation of commissions. But this shall not apply in case of a specific legacy or devise.”
This is a mandatory provision, that such expenses as are here involved must •be allowed when the court is supervising the administration of the estate. The court has no discretion in the matter of allowing such expenses except perhaps as to the reasonableness thereof and that feature is not involved in this proceeding and if it were this Board could determine the reasonableness of the amount. Una Libby Kaufman, Executrix, 5 B. T. A. 31.

The laws of New York specifically made provision for the allowance of the expenses in that case. In this case the laws of Texas make no such provision.

In the Voelbel case, supra, the will of the decedent was probated in the Surrogate’s Court of Kings County, New York. The executor was duly qualified and was acting as such when he employed an attorney for a stated fee, and a greater compensation if the Surrogate’s Court would approve of a larger fee. Section 222 of the New York Surrogate’s Court Act provides as follows:

An executor, administrator, guardian or testamentary trustee may pay from the funds or estate in his hands from time to time, as shall be necessary, his legal and proper expenses of administration necessarily incurred by him, including the reasonable expense of obtaining and continuing his bond and the reasonable counsel fees necessarily incurred in the administration of the estate. Such expenses and disbursements shall be set forth in his account when filed, and settled by the surrogate.

In that case the respondent urged that the administration expenses, such as those under consideration, being subject to the orders of the court, and not having been paid or “settled” by the court do not come within the purview of section 403 of. the Act as expenses that are “ allowed by the laws of the jurisdiction * * * under which the estate is being administered.” We said (p. 278): “Upon that point we believe the Stem case is controlling, and that regardless of the fact that the claims have not been paid, or passed upon by the court, they are deductible in an otherwise proper situation.” (Italics added.)

In Appeal of Samuel E. A. Stern et al., Executors, 2 B. T. A. 102, we said:

It does not appear from the above that the amounts are required either to have been allowed by actual order of the court or to have been paid, but merely that they shall be such charges as are proper deductions and as in the ordinary course of the administration of the estate will ultimately be allowed. In case the amount actually expended presents a material variance from the amount “ allowed by the laws of the jurisdiction, * * * under which the estate is being administered,” some question may properly arise as to whether the amount actually expended or the amount lawfully allowable shall be used. It would seem, however, to be the obvious intent of Congress that the determination of the estate tax should not wait upon the final settlement of the estate and a reduction to absolute certainty of all claims against it. The Board is, therefore, of the opinion that the amount claimed by the taxpayer for executors’ fees in the sum of $15,500, not denied by the Commissioner as a reasonable estimate of the amount allowable or allowed by the laws of the State of New York, should be permitted to be deducted in the computation of the tax. Should there be a variance on final administration, the Commissioner, if he believes there is warrant in the law for so doing, may at that time assert a deficiency in tax upon which the Board may then properly pass.

In the cases referred to the expenses were allowed in the sense that they were permitted by the law of the jurisdiction.

In this case the law of the jurisdiction made no provision for such expenses under the circumstances set out. The Supreme Court of Texas has held that under such facts the law does not authorize the incurring of expenses of administration.

The expenses here involved were neither allowed nor allowable by the lex domicilii. Therefore, under the express provisions of section 403 (a) (1) the amounts are not deductible in determining the net estate.

The respondent was in error in allowing a deduction of $6,250 as attorney’s fees. The deficiency should be increased accordingly.

Reviewed by the Board.

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


source: Caselaw Access Project

author: Sterniiagen:

license: Public Domain

text:
    H. L. Campbell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18321.
    Promulgated October 29, 1927.
    Under tbe Revenue Act of 1921, section 201 (e), a dividend payable witbin tbe taxable year is not for that reason alone “ unqualifiedly subject to demand ” of tbe stockholder, and where as in this case check therefor was mailed on the last day of the taxable year and received the following year, held, not included within gross income of the distributee for the earlier year.

      E. E. Shelton, Esq., for the petitioner.

      A. W. Gregg, Esq., for the respondent.
    Deficiency of $97.16 income tax for the calendar year 1923. The Commissioner included in petitioner’s income a dividend mailed to him in 1923 and received in 1924. The case was submitted on a stipulation of facts and briefs.

      FINDINGS OF FACT.
    The petitioner is an individual residing at Lynchburg, Ya. During the year 1923 he was a stockholder and president of the Glamorgan Pipe & Foundry Co. of Lynchburg, Va. The said company declared a dividend payable December 31, 1923, of which the amount coming to the petitioner was $1,690. The .corporation mailed a check to petitioner on December 31, 1923, addressed to him at Lynchburg, Ya., which was received by him in the regular course of the mails on January 1, 1924, a holiday. Petitioner did not deposit or cash the check until January 2, 1924.
    Petitioner has consistently kept his books upon a cash receipts and disbursements basis, and reported the dividend as income for the year 1924 and paid the tax thereon.
   OPINION.

Sterniiagen:

The Board has recently reversed the Commissioner in a similar situation, Robert W. Bingham, 8 B. T. A. 603, and it is unnecessary to set forth here the reasons for the decision. It may be said, however, as to the present case, that the stipulated facts show only that the dividend was declared and made payable in 1923 and check was mailed in that year. This is not, as a matter of law, the equivalent of saying that “ the cash or other property is unqualifiedly made subject to his demand.” It may be the skeleton, but more evidence would be needed to fill out the body of the statute.

Reviewed by the Board.

Judgment of no deficiency will be entered for the petitioner.

Morris and Love dissent.


author: Littleton :

text:
    Etta Radin, Administratrix, Estate of Samuel Radin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8175.
    Promulgated October 29, 1927.
    1. Assessment and collection of tlie deficiency in income tax for the period January 1, to November 8, 1919, is barred by the statute of limitation.
    2. The evidence is insufficient to show that the Commissioner’s determination of deficiencies in income tax for the period November 9 to December 81, 1919, and for the calendar year 1920 was erroneous.

      William Suroshy, Esq., for the petitioner.

      Joseph K. Moyer, Esq., for the respondent.

      The Commissioner determined a deficiency in income tax due from Samuel Eadin during the period prior to his death from January 1 to November 8, 1919, in the amount of $3,620.89, a deficiency in income tax against his estate for the period November 9 to December 31,1919, in the amount of $7.97, and a deficiency for the calendar year 1920 in the amount of $5,665.96.
    The administratrix claims that the Commissioner erred in his determination of the deficiency for the period January 1 to November 8, 1919, in that he ignored inventory figures claimed in the return. It is also claimed that the assessment and collection of a deficiency for this period is barred by the statute of limitation of five years. The deficiency for the period November 9 to December 31, 1919, is not in controversy.
    As to the calendar year 1920, the administratrix claims that the Commissioner erred in refusing to accept inventory figures shown in the returns and in determining that the estate realized a gain of $10,000 upon the sale of property owned by Samuel Eadin at the time of his death.
    FINDINGS OP PACT.
    Etta Eadin is the administratrix of the estate of Samuel Eadin, who died intestate November 8, 1919. At the time of his death, Samuel Eadin was engaged in selling merchandise at retail in Paterson, N. J., and after his death this business was carried on by his widow as administratrix. Subsequent to the death of Samuel Eadin, Etta Eadin, as administratrix, filed in his name an individual income-tax return for the period January 1 to November 8, 1919. This return was executed on April 9, 1920, and shows that it was received by the collector of internal revenue for the fifth district of New Jersey on May 8, 1920. The administratrix also filed income-tax returns for the estate of Samuel Eadin for the period November 9 to December 31, 1919, and for the calendar year 1920. On October 3, 1925, the Commissioner mailed by registered mail a notice of his determination of deficiencies for the periods January 1 to November 8, 1919, November 9 to December 31, 1919, and for the calendar year 1920.
    The income-tax return filed for Samuel Eadin for the period January 1 to November 8, 1919, was not false and fraudulent with intent to evade the tax and no consent in writing has been entered into between the taxpayer and the Commissioner for assessment and collection of any tax for this period beyond the five years provided by the statute. The deficiency of $3,620.89 determined by the Commissioner, as set forth in his notice mailed October 3, 1925, has not been assessed.

      Complete accounting records of the mercantile business were not maintained but such records as were kept were upon the basis of cash received and disbursed. In the income-tax return filed for the periods in controversy, certain figures purporting to reflect the income arising from the operation of the business were stated therein. In these returns a certain amount was claimed as the cost of goods sold, determined by a figure alleged to represent the merchandise inventory at the beginning of the accounting period, to Which was added an amount alleged to have been expended for merchandise during the period, and, from the total so determined there was deducted an amount alleged to represent the closing inventory for the accounting period, and the balance remaining was deducted from gross income as the cost of the goods sold. The Commissioner audited these returns and made an investigation and audit of the books and records of the business and concluded that the inventory figures were incorrect and that the accounting method employed by the petitioner did not clearly reflect income. In determining the cost of goods sold during each of the accounting periods, the Commissioner eliminated the inventory amounts claimed on the returns and employed instead, as the cost of goods sold during the year, the amounts found by him from such investigation and audit to represent the amounts actually expended during each period for the purchase of merchandise.
    On September 3, 1919, Samuel Eadin and others, and the Miesch Manufacturing Co., a corporation, entered into a purchase-and-sales contract under the terms of which the Miesch Manufacturing Co. sold to Eadin et al. a certain tract of land and premises situated thereon, at an agreed price of $171,200. Prior to his death, Eadin paid on account of his proportion of the purchase price of said property the sum of $25,000 in accordance with the contract. The Commissioner determined that the value of Samuel Eadin’s interest in this property at the time of his death was $25,000, and there is no controversy concerning this. Upon the death of Eadin, his widow, Etta Eadin, was duly appointed administratrix of his estate and the guardian of their two children, Clarence EL, age 12, and Joseph, age 7. On January 31, 1920, while the estate of Samuel Eadin was in process of administration and settlement, Etta Eadin individually, and as administratrix and guardian of the two children, sold and conveyed the interest in the property of which Samuel Eadin died siezed and possessed for the sum of $35,000, and this sale was approved by the Chancery Court on April 19, 1920, the decree of the court also providing that—
    These proceedings are to be without prejudice to the said claim of said Etta Radin that she is, individually, entitled to a larger interest in said lands and premises than the estate in dower therein, stated in the Bill of Complaint, which said claim is to attach, upon such conveyance, assignment and transfer, to the proceeds thereof so to be paid in to this Court, provided she institute proceedings in this Court to substantiate and enforce said claim within sixty (60) days after the date of said deed of conveyance, or such further time as this Court, on good cause shown, may allow, and prosecute the same with diligence; and in case of her failure so to do her said claim shall be considered as abandoned and cease to be attached to such proceeds, and such proceeds shall be distributed free and clear of said claim; but before instituting such proceedings she is to obtain a discharge and release from her said offices of adminis-tratrix and guardian, and others are to be appointed in her place and stead, therein; and provided further, that in case Mrs. Etta ftadin shall, before being so discharged and released, decide to abandon her said claim, she is, upon filing a statement of such decision in this Court in this cause, and furnishing such further security as such administratrix and guardian, if any, as this Court may require, to be entitled to have paid to her, as such administratrix and guardian, said proceeds of said sale and the accumulated interest thereon.
    In the return filed by the estate, a profit of $10,000 upon the sale of this property by the administratrix was not included and upon audit the Commissioner increased the income of the estate accordingly. The administratrix assigns error in this regard claiming that the profit of $10,000 is taxable, if at all, to the beneficiaries of the estate.
   OPINION.

Littleton :

The evidence shows that the income-tax return of the individual income of Samuel Eadin prior to his death for the period January 1 to November 8, 1919, was filed with the collector of internal revenue on May 8, 1920, more than five years before the mailing of the deficiency notice upon which this proceeding is based. At the hearing the taxpayer claimed that no consent had been executed and counsel for the Commissioner claimed that a “ waiver ” of the statute of limitation had been filed for the period January 1 to November 8, 1919, and offered in evidence a paper writing purporting to be a consent entered into between the estate of Samuel Eadin and the Commissioner for a determination and assessment beyond the statutory period of limitation. Upon examination it appeared that the consent in question related to the determination and assessment of any additional tax that might be due for a taxable period subsequent to the death of Samuel Eadin which the administra-trix had not claimed was barred. The Commissioner thereupon withdrew the offer of this document in evidence. The taxpayer and the Commissioner have not consented in writing to the assessment of any tax for the period January 1 to November 8, 1919, beyond the five-year period prescribed by the statute of limitation. The deficiency involved has not been assessed and the return was not false and fraudulent. It is not claimed by the Commissioner that any suit has been instituted for the collection of the tax without assessment. The deficiency for the period January 1 to November 8, 1919, is barred and there is, therefore, no deficiency for that taxable period.

The Commissioner determined that the opening and closing inventories claimed by the petitioner for the calendar year 1920, were incorrect, and that the method of accounting employed by the petitioner did not clearly reflect income. After an audit and investigation of the books and records, the Commissioner computed the income for the period upon such basis as in his opinion clearly reflected income — the basis used by him being the cash receipts and disbursements basis, and the petitioner has not submitted sufficient evidence to show that his determination was erroneous. We therefore approve the Commissioner’s determination in this regard.

There is no question in this proceeding concerning the profit upon the sale of the property owned by the decedent at the time of his death or that, at the time of such sale by the administratrix, the estate of Samuel Eadin was in process of administration and settlement. During the year 1920 Etta Eadin held the property as administra-trix and as guardian. The Board is unable from the evidence to hold that the Commissioner erred in taxing the profit upon the sale of the property of the estate under the provisions of section 219 of the Eevenue Act of 1918.

Eeviewed by the Board.

Judgment will be entered on IS days' notice, under Rule SO.


author: Smith: Love,

text:
    Appeal of John W. Graham. Appeal of Alma M. Graham.
    Docket Nos. 644, 645.
    Promulgated October 29, 1927.
    An agreement between father and mother on the one hand and their son on the other that the son should have a one-third interest in the profits and losses of a partnership of which they were the sole members does not constitute the son a member of an ordinary partnership.

      George S. Olwe, G. P. A., and Frank G. Olive, Esq., for the petitioners.

      B. H. Saunders, Esq., for the Commissioner.
    These appeals are from determinations of deficiencies in income tax for the year 1920 and in each appeal the amount involved is less than $10,000. The cases were consolidated for hearing. The sole issue presented is whether John M. Graham, a minor son of the petitioners, was in fact and in law a partner with his parents in the profits of a partnership business conducted by them during the taxable year.
    FINDINGS OF FACT.
    The petitioners, John W. Graham, and his wife, Alma M. Graham, have for several years conducted a business in Edinburg, Ind., and particularly from 1918 to January 1, 1920, said business was conducted as a copartnership by those two persons, and known as the Edinburg Cabinet Co.
    At the beginning of the year 1920, their son, John M. Graham, who was then 14 years old, was attending high school, in the senior class, and expected to graduate at the close of the term. It was the son’s desire, as well as the desire of his parents, that he continue his school work through higher institutions. The son was of good character and had shown evidences of thrift and economy.
    It had been something of a custom practiced in the family of Graham and his wife, by their respective parents, to make some arrangements, when a son approached the age of majority, by which he was given an opportunity of owning in his own right funds sufficient to meet necessary expenses of education and maintenance, and then require him to pay his own way out of such funds. Such plan was resorted to with the idea that it would tend to develop thrift and economy in the boy, and for other purposes.
    In the early days of 1920 the petitioners discussed such a plan for their son and then called him into the conferences and thoroughly explained their plans to him, and he agreed to them.
    ^ There were no written articles of copartnership executed nor was the agreement which the petitioners had made with their son reduced to writing. The oral agreement was simply that the son should have, for his own, one-third of the profits of the copartnership 4 business which should be reduced by one-third of any losses sustained in any year. The son was given no part of the corpus of the assets. During the year' 1920, each of the petitioners and the son were credited on the partnership books with one-third of the profits, which totaled for the son’s part at the close of the year, $28,920.62.
    The business during the year 1921 suffered a loss and the son was charged with one-third of such loss in the amount of $788.87. In 1922 the son was credited with one-third of the profits in the amount of $14,134.88.
    After January 1, 1920, the son, John M. Graham, bore all of his own expenses and attended college, after finishing high school. He proved himself to be a steady, hard-working young man, thrifty and frugal. At the close of the year (]J5^ he had on the books to his credit a little over $34,000. At that time it became apparent to the petitioners that under the arrangement made by them their son would soon own the entire business, since his withdrawals from the business were much less than those of his father and mother. It was then proposed that they buy out the son’s interest at its then book value. The son agreed to this and the parents then bought out his interest and paid him the book value of his credit account, something in excess of $34,000. This was paid to him in Liberty bonds and other first-class securities which the son deposited in a safety-deposit box, since which time he has regularly collected the interest and dividends therefrom.
    On May 1, 1918, there was executed and filed in the office of the Clerk of the Circuit Court of Johnson County, Indiana, the following certificate :
    This certifies that the undersigned, conducting and transacting business at Edinburg in the County of Johnson and State of Indiana, under the name and style of “ The Edinburg Cabinet Company ” that the office thereof located at Edinburg in the State of Indiana and that the name and residence of each and every person engaged in said business or having an interest therein as follows, to-wit:
    Name. Residence.
    Alma Graham_Edinburg, Ind.
    John W. Graham-Edinburg, Ind.
   OPINION.

Smith:

Under the provisions of the Eevenue Act of 1918 individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. (Section 218(a).) “The term partnership as used in these sections obviously refers only to ordinary partnerships.” Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 110.

Chancellor Kent defined a partnership as follows:

A contract of two or more competent persons to place their money, effects, labor and skill, or some or all of them, in lawful commerce or business, and to divide the profit and bear the loss in certain proportions. 3 Kent’s Commentaries.

In Story on Partnerships a partnership is similarly defined as:

A voluntary contract between two or more competent persons to place their' money * * * in lawful commerce or business, with the understanding that there shall be a communion of the profits between them.

Mr. Justice Lindley says:

By the law of this country, a valid contract of partnership can be entered into between any persons who are not under the disabilities of minority or unsoundness of mind, and are not convicts within the meaning of 33 and 34 Viet ch. 23 * * * There are certain trades, businesses and professions which can not be lawfully carried on either solely or in partnership, unless some statutory requisite has been complied with, but now that the disabilities under which spiritual persons formerly lay have been removed, the author is not aware that there is any class of persons (except convicts), who, being of sound mind and over twenty-one years of age, are rendered incapable of becoming member's of partnerships * * * Agreements entered into between several persons, some of whom are by law incompetent to contract, are not wholly null and void, but are only in some respects less effective than if all the parties to them were competent. Hence there is nothing to prevent a person who is not swi juris from being a partner. But if any such person is a partner, his or her want of capacity to contract will necessarily give rise to consequences deserving special notice. Lindley on Partnerships (8th ed.), page 86.

Although a question might be raised as to whether a partnership containing one or more minors is an ordinary partnership within the meaning of the above-cited decision of the Supreme Court, we think it is not necessary to decide that question in this instance. The evidence of record does not show that the petitioners ever intended to enter into a partnership agreement with their son. The following is from the transcript of testimony of John W. Graham.

Q. Was that conversation with the boy with you and your wife?
A. Yes, both of us.
Q. You may relate to the Member of the Board as near as you can the conversation that took place with your boy. I
A. We called him in at home there and told him that we were considering putting him on his own hook; that is, we would give him a one-third interest in the profits and losses of the Edinburg Cabinet Company, and he was to be on his own hook, his own responsibility from that time on; that he was to educate himself; about that time he was going away to school, in a few months from then, first going to Culver, Indiana, and to school in Indianapolis; we told him that out of that money he was to buy his clothes, pay his expenses — in fact, buy everything he used.
We wanted him to be careful, not to be too extravagant, but our idea, where the idea came from, was the same basis our whole family had started on, to put a boy on his own responsibility, when he is leaving you, when you are getting ready to send him away, to absolutely put him on his own responsibility, not only in a monied way, but to allow him to make his own arrangements for whatever he does, buy his own clothes, pay his expenses, do everything for himself.

The son assented to the proposition made to him. Likewise, when in 1922 it was suggested to the son that by reason of the fact that his expenses were not nearly as great as those of his father and mother and he was becoming the owner of too large an interest in the business, he readily acquiesced in their suggestion to the cancellation of the arrangement existing between them.

There is no evidence in the record that the son ever contributed any property or any services to the partnership and it is very improbable, considering his age, that he ever performed any services for the partnership. The arrangement, as the father stated in his testimony, was simply for the purpose of allowing the son to have a fund from which he could support himself. In Appeal of Julius Goldenberg, 5 B. T. A. 213, the Board held that an oral agreement between a sole proprietor and members of his family that they should receive a stated percentage of the profits of the business did not establish the existence of a partnership. The application of the same principle to the case at bar leads us to approve the action of the respondent in denying the existence of an ordinary partnership between the petitioners and their minor son.

Reviewed by the Board.

Judgment will be entered on 15 dags’ notice, wider Bule 50.

Love,

dissenting: I can not agree with the decision reached in this case. I personally heard the testimony in the case. From the manner in which the witnesses testified and their demeanor, I believe they were frank and honest, and that the three persons involved honestly intended to form and thought they had formed a partnership. I realize the fact that in tax matters an alleged partnership composed of members of a family, especially where minors who contribute nothing to the invested capital of the business, are involved, the bona - fides of the transaction should be carefully scrutinized.

Having stated what is contained in the first paragraph above with reference to my personal impressions, I shall discuss the case purely in the light of the record, and on the same basis of facts on which the prevailing opinion handles it.

That the father, mother and son intended to form a partnership in the early months of 1920, and that they thought they had formed such an association is clearly evidenced by the manner in which they kept their books, crediting each member with one-third of the profits in years when profits were realized, and charging each with one-third of the loss in the year when a loss was sustained. In those three years they made partnership returns for income-tax purposes each reporting one-third of the profits. When the Commissioner, in 1924, denied the status of partnership, they all contested such decision and asserted the partnership status.

The testimony quoted in the prevailing opinion does not, in my opinion, negative in the least an intention to form a partnership. It merely undertakes to repeat what was said to the son concerning the purposes and objects of the then contemplated arrangements. The parents wanted to place upon their son responsibility, teach him economy and thrift, and initiate him into real business. They then sought to impress upon him those purposes. Had Mr. Graham, in response to counsel’s request, answered by stating that they formed a partnership, or that they told the son they were going to take him in the firm as a partner, such a response would have been subject to objection, and would probably have been met with a motion to strike the answer from the record, as a legal conclusion.

On the record, there are two questions of law that must be answered in the affirmative before a decision in favor of the contentions of the taxpayers shall prevail.

First, is a minor competent to make a contract of partnership. Second, can there be, in law, a partnership status when one member of the associated group contributes nothing, either in the way of money, property, or service, to the invested capital.

I believe it is uniformly held in all jurisdictions in the United States that a minor is competent to enter into a partnership contract and that the minority of a member does not affect the validity of such partnership status, and that no one, save the minor himself, may challenge the binding effect of such contract. I can not perceive wherein any serious “ question might be raised as to whether a partnership containing one or more minors is an ordinary partnership within the vmeaning of the above-cited decision of the Supreme Court.” There is nothing in the Burk-Waggoner case that tends to draw a distinction between ordinary, and extraordinary partnerships. There is no such distinction made or indicated in the revenue acts. So far as I am aware, no such distinction has been made by any recognized authority. A given status is either a partnership or it is not a partnership. In law it can not be a partnership, and not be an ordinary partnership. It is true that a statutory “ limited ” partnership may be formed. That, however, is a partnership with certain limitations regulated by statute. No question of that kind appears in the instant case.

In the case of Continental National Bank v. Strauss, 32 N. E. 1066, the following appears:

There can be no question but that an infant may become interested in business as a general partner. Nothing forbade it at common law, and nothing in the statutory law now forbids it. His infancy was a factor in the situation, which enabled him to disaffirm his obligations and agreements, and, in that / respect, the privilege was a personal one to himself. Infancy does not disable \one from entering into contracts, and, so long as the infant does not avail himself of the privilege to set up his infancy in bar of or to avoid an obligation, his position and his acts are those of any responsible person. Any other view of his situation would lead to holding all his acts and engagements void, whereas they are voidable merely, at his election. * * * If the general partner, or one of the general parners, is a minor, he, nevertheless, is responsible for all partnership engagements, and will be unless and until he elects to \set up the personal plea of infancy. But that he will do so is not to be presumed. To the contrary is the presumption.

Now considering the question of partnership, the following is found in E. C. L., vol. 20, p. 834:

To constitute a partnership it is not necessary that there should be a combining of property furnished in part by each of the associates, for one partner may contribute ail of the capital and may even continue to own all of the property used in the business, the capital of the firm merely consisting of the right to use such property.

To the same effect is the case of Breinig v. Sparrow, 39 Ind. App. 455.

Partnership is a status, the result of contract, as the marriage relation is a status or relation. (E. O. L. vol. 18, p. 801, which cites a number of cases.) It is settled law that in the absence of a contract agreement to be partners, or an agreement among themselves to assume the duties, obligations and rights of partners, which the law designates a partnership, there can be no partnership status or relation between and among individuals. Individuals who are not partners, and never intended to be partners may be held liable’to outside creditors under the doctrine of estoppel, but that holding does not make them partners.

There do not appear to be any adjudicated cases reported, in which the individuals claimed to be partners, and that status was denied and attacked by outside parties. It seems to have been uniformly conceded that when two or more persons agreed among themselves to be partners and claimed such status, no one had a right to say them nay. But it is contended that an essential element of a partnership is a contribution on the part of each and all its members to the corpus, or capital of the business, such contribution being either of money or its equivalent, or services.

There are some cases reported where the status of partnership was attempted to be proved, and on failure to prove any contribution to the corpus, the court refused to decree partnership, basing the decision largely on the ground that the alleged partner had contributed nothing to the corpus. But it must be borne in mind that in those cases, outside parties were striving to establish the partnership status over the protest and denial of the alleged partners. So far as we have been able to ascertain, the status or relation of partnership has never been disturbed by a decree of a court where the parties themselves asserted an agreement of partnership. The relation or status of partnership is created by contract. Without a contract agreement the status can not exist. With such an agreement whatever the terms of that agreement may be, there is a partnership, and on proof of such agreement the individuals are liable as partners.

The partnership test as to the existence of the partnership relation which is most widely accepted today and which is applicable especially between the parties themselves, irrespective of the rights of third persons is that a partnership is formed and exists only when it was the intention of the parties that they should be partners. (R. O. L., vol. 20, p. 831, supported by many cases cited.)

We must bear in mind that an attack on a claimed partnership status by outside parties has not furnished the occasions for a discussion of this question but the cases in which the discussion has arisen have been those in which outside parties attempted to establish such status over the protest of the alleged partners and in the face of their denial of the existence of a contract. No one seems to have contested the existence of the status in the presence of a contract to that effect. The attempt in these cases was to prove existing conditions, which inevitably established the status of partnership as a matter of law, regardless of the name which the parties associated called themselves, by proving conditions which created a status recognized by law as a partnership, whether they called it a partnership or not. Under such conditions, it is obvious that the presence of such controlling factors as contribution to corpus, sharing of profits, authority of each member to bind the association, and other factors are looked to and their relative importance determined. No such condition is involved in the instant case. Here the partnership status is attacked from the outside, not to prove the existence of that status, but to prove its nonexistence, in the face of a contract among the parties themselves to be partners, and in the presence of the existence of one of the factors almost universally recognized as a sme qua non of the partnership relation, to wit, a sharing, as a principal, of the profits and losses of the business. Still bearing in mind that text writers and courts in discussing this question, discussed it from the standpoint of an attack from the outside, striving to prove the existence of factors which by operation of law created the status of partnership regardless of the name given to the association by its members, we quote further from Ruling Case Law, vol. 20, p. 800:

The difficulty of formulating a definition of a partnership, at once accurate, comprehensive and exclusive, is said to be insuperable. (Citing 18 L. R. A., N. S. 967.)

Chancellor Kent .defined partnership:

As a contract of two or more competent persons to place their money, effects, labor and skill, or some or all of them in lawful commerce or business, and divide the profits and bear the losses in certain proportions.

Discussing the definition of Chancellor Kent, it is said:

It should be noted, however, that whether the association requires that one or more of the partners shall contribute labor or skill, or something else, is a question which may be considered as subsidiary, and for this reason the definition of Chancellor Kent has been criticised. (Citing a number of cases.)

Quoting further, page 801:

Furthermore, while a partnership is frequently referred to as a contract, it is rather the result of a contract, or to speak precisely, a relation or status somewhat as marriage is a relation or status. A definition which avoids these possible criticisms of the language of Chancellor Kent is formed in the provisions of the Civil Codes of certain states, which provide that a partnership is the association of two or more persons for the purpose of carrying on business together, and dividing its profits between them.

See California Statutes, section 2395.

Under the above statutory definition, the status of partnership could be legally created between or among two or more persons, even though strangers as between themselves, regardless of contribution on the part of one member or any other factor, save the one of distribution of profits and losses (waiving the question of consideration, which no outsider would have a right to raise). The internal operations and relations are subjects purely of contract among themselves, which no outsider has a right to challenge.

The Supreme Court of Indiana, in the case of Campbell v. Pence, 118 Ind., 313; 20 N. E. 840, quotes, with approval, the following excerpt from the case of Bromley v. Elliot, 38 N. H. 287:

It [a partnership] may as well exist between factors and brokers, or agents, whose sole employment relates to the property and business of third persons, as among those who jointly own the property in which they deal. There can be no valid reason why in such the ownership of the goods in which a partnership deals should not belong to one of the partners exclusively, just as well as it might to a stranger, without any way affecting the validity of the partnership. The essence of the contract is that they should be jointly concerned in the profits and loss, or in profits only, in some honest and lawful business, the relation of partners being established by the fact that they share the profits between them.

Siefkin concurs in the dissent.


author: MoRkis :

text:
    Ambrose D. Henry, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5903.
    Promulgated October 29, 1927.
    1. Debts due the petitioner, a stock broker, arising from overextended margin accounts, not having been satisfactorily proved to be worthless and charged off within the taxable year 1919, can not be allowed as a deduction in computing net income for that year.
    2. Petitioner was one of three partners engaged in the stock brokerage business. In November, 1919, the firm met with financial difficulties and petitioner, in the settlement of the firm’s debts, paid not only his pro rata share, but also the share of one other partner.

      Held, when petitioner paid his partner’s share of the firm’s obligations a debtor-creditor relationship arose between the petitioner and his partner. The ascertainment of the worthlessness of this debt and its charge-off within the year 1919 not having been satisfactorily proved, the debt can not be allowed as a deduction in that year.

      Camden B. MeAtee, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income taxes for the year 1919 of $5,450.59. The issues raised by the pleadings are:
    1. Whether respondent erred in disallowing the deduction of certain debts alleged by petitioner to have become worthless in 1919, but which were not charged off until March, 1920.
    2. Whether petitioner having been compelled to pay the indebtedness of the copartnership upon dissolution without contribution from one of his partners, is entitled to deduct said partner’s share of the amount so paid in the year 1919 in the computation of his taxes for that year.
    BINDINGS OF FACT.
    Henry Brothers & Co. (hereafter referred to as the firm), was a copartnership organized in 1917 for the purpose of entering into the stock brokerage business in New York City. The New York office was conducted by the petitioner, who was the senior partner, and O. W. Muller, one of the junior partners. The firm also operated a branch office in Newark, N. J., which was conducted by John G. Miller, the other junior partner.
    The firm shared in the general prosperity prevailing in the early . months of 1919, and it being the custom of the firm to distribute profits monthly, it distributed during the first three months of 1919, 40 per cent to Henry, 10 per cent to Muller and 50 per' cent to Miller. On account of the general decline in the stock market and the overextended condition of the firm’s margin accounts it had sustained severe financial reverses by November 14, 1919, and was compelled to discontinue business. Petitioner being the financial backer of the firm was, upon discontinuance of business, obliged to meet not only his share of the firm’s obligations but also the share which should have been borne by Muller, and for this purpose he borrowed $75,000 on his personal credit. Muller was also personally indebted to the firm because of an overextended margin account carried for him by the firm, and also as guarantor on a customer’s account. In his attempt to collect something from Muller, petitioner forced him into bankruptcy in 1923, but was unable to realize anything on his obligations.
    At the time of the discontinuance of business the firm was carrying four margin accounts of one George C. Smith, which accounts at the time trading therein was suspended, showed a net aggregate debit balance greatly in excess of the value of the collateral security held therefor. On November 8 or 9, 1919, petitioner notified Smith that he would have to put up additional margin, or that his accounts would be closed and Smith promised that he would try to protect them, but having failed to do so, Smith was prohibited from further trading after' November 17, 1919. The accounts of Smith were marked Nos. 1, 2, O, and B. So much of each of these accounts as are deemed pertinent to the issues herein and reveal the activity therein through the period during which the firm was in liquidation, will be set forth in the order mentioned.
    Account No. 1, showing the balance brought forward at December 1, 1919, to the date of closing, March 16, 1920, shows the following entries;

    Account No. 2, showing the balance brought forward at December 1, 1919, to the date of closing, March 16, 1920, shows the following entries:

      Account No. O, showing the balance brought at December 1, 1919, to the date of closing, March 16, 1920, shows the following entries:

    Account No. B, showing the balance brought at December 1, 1919, to date of closing, March 16, 1920, shows the following entries:

    The balances of all the foregoing Smith accounts were properly-ruled and the balances brought down at January 1, 1920, and the accounts were duly charged with interest and carrying charges for the month of January. The Liberty bonds held as collateral security in accounts Nos. 1, O, and B, were sold in February, 1920, and a credit made to each of these accounts on February 13, 1920, for the proceeds from the sale thereof. Account No. 2 discloses that it was credited on February 16, and 27, 1920, with a dividend on two shares of Burns Brothers’ stock and with the proceeds from the sale of those two shares. That account shows further that on March 4, 1920, a credit entry of $30,000 was made which bore the following description: “ Del. Dec. 29 J. S. Bache account of Schatzkin 600 Bep. Motors at $50.” The following balances of the four Smith accounts hereinbefore referred to were charged off by Journal Entry No. 81, March 16, 1920:
    No. 1_$8,409.73
    No. 2_ 52, 435.52
    No. O_ 1, 771. 05
    No. B_ 421. 90
    63, 038.20
    After the closing of the four Smith accounts, petitioner attempted to collect the balances thereof, but Smith contended that Muller had failed to carry out instructions relative to his accounts and that his failure to do so resulted in the losses complained of. Petitioner did not employ an attorney because he thought it would be a waste of money, but he personally called upon Smith several times, attempting to make collection.
    In addition to the permanent books of record, the firm also maintained separate records for the use of the margin clerk, whose duty it was to notify the partners when fluctuations in accounts necessitated additional collateral for customers’ accounts. The Smith accounts were suspended in November, 1919, and further trading therein was prohibited because of the failure of Smith to deposit additional collateral.
    The partneirship’s return for 1919 shows a deduction of $96,224.05 for bad debts, which amount did not include the losses sustained through Muller’s failure to meet his personal obligations to the firm. Of that amount the respondent allowed $33,185.85 as a deduction, leaving the amount of the four Smith accounts hereinabove referred to of $63,038.20 which was disallowed. Although petitioner attempted to effect an understanding with Muller in 1920, and he later forced him into bankruptcy in 1923, he has not succeeded in collecting anything from him either on account of his personal obligations to the firm or for his share of the firm’s losses. At the time of dissolution, no agreement was entered into with Muller with respect to paying the partnership’s debts. Petitioner paid the partnership’s debts voluntarily from a sense of honor and good judgment.
    During the last nine months of 1919, the partners’ profit-sharing percentages were 35 per cent to petitioner, 25 per cent to Muller, and 40 per cent to Miller.
    The petitioner, by motion at the hearing, amended his petition, whereby he claims to be entitled to deduct not only his pro rata share of the $33,185.85 of the bad debts allowed by the respondent as a deduction, but that he is entitled to deduct in addition thereto the amount which would ordinarily be deductible by Muller, who had failed to bear any portion of that amount.
   OPINION.

MoRkis :

The first question in issue is whether or not the respondent erred in disallowing as a bad debt deduction in 1919, the aggregate amount of the four Smith accounts hereinabove referred to. The petitioner contends that they should have been allowed as a deduction ; the respondent on the other hand, contends that the amount of $63,038.20 sought to be deducted, was not ascertained to be worthless and charged off within the meaning of the statute and therefore the deduction should not be allowed.

Section 214 (a) (7) of the Revenue-Act of 1918 provides:

(a) That in computing net income there shall be allowed as deductions:
# * * * * *
(7) Debts ascertained to be worthless and charged oft within the taxable year.

Thus it will be seen that in order to comply with the provisions of section 214 (a) (7) above the petitioner must not only have ascertained these debts to be worthless, but must have charged them off within the taxable year, in order to avail himself of the deduction. Let us examine the testimony and see if these two tests have been satisfactorily met. The testimony shows that Smith was called upon to deposit additional collateral in November, 1919, and that failing to comply with these demands, trading in his accounts was suspended. The petitioner testified with respect to his investigation of Smith that “As near as I can find out, he is an automobile salesman; 1 do not know whether it is a salesman or not, — I would not be certain what it is, but he is traveling here and everywhere out of Detroit now.” The petitioner was asked whether Smith owned the home he lived in in Hackensack in 1919, and he replied: “That I do not know; I do not know whether he owned his home or not.” He was again asked if he knew where Smith did his banking and the petitioner replied: “No, I think he did it through, — the only thing I know is that everything came through Mr. Schatzkin.” Petitioner did not know whether he had an individual banking account or not. When asked whether Smith owned an automobile, petitioner replied: “ I do not know whether he did or not. I was not intimate with him at all.” It appears from the testimony of the petitioner, that he has never given up hope of collecting from Smith, because as his testimony shows he went to Smith’s home several weeks just prior to the hearing with respect to this matter.

It appears to us from this testimony that the petitioner shows very little knowledge of the financial condition of Smith — certainly not a sufficient knowledge for him to appraise the worthlessness of these debts in 1919. We are of the opinion that the testimony with respect to the worthlessness of this debt in 1919 has not been satisfactorily established. However, we need not rely solely upon the question of whether or not these amounts were ascertained to be worthless in 1919. As will be observed the statute provides two tests which must be complied with. First, the debt must be ascertained to be worthless and, second, it must have been charged off within the taxable year. Greenville Textile Supply Co., 1 B. T. A. 152; Donalsonville Oil Mill, 1 B. T. A. 167; Dover Iron Co., 1 B. T. A. 1123. Petitioner contends that the transactions with Smith were closed when the margin clerk closed his accounts, and that therefore, that was sufficient charging off to meet the statutory requirements. We do not deem that this actually effects a charging off within the meaning of the statute.

The Smith accounts were closed as far as additional trading was concerned in November, 1919, but this action by the firm was to prevent additional losses. Had Smith subsequent to this alleged closing, deposited additional collateral in compliance with the firm’s demands, his account no doubt would have been thrown open for further trading. As we have shown hereinbefore, the four Smith accounts were carefully ruled at December 31, 1919, and interest charged in December and the balances brought down at that time, and further, that interest was charged in January, 1920. It seems clear that if the petitioner had regarded these accounts as worthless at any time prior to December 31, 1919, he would have made the actual charge-off within 1919 instead of bringing forward the balances at that date and charging the accounts with interest and carrying charges for the month of January. Certainly no more bookkeeping effort would have been required to effect a charge-off than was required to bring down these balances and make additional entries. It is true that the accounts contained collateral securities in the form of Liberty bonds which might have prevented the closing of these accounts, but as the testimony shows, and it is a well known fact, the value of Liberty bonds changes only slightly from month to month, therefore these bonds could have been as easily disposed of in 1919 as in 1920.

The petitioner cites Appeal of Mason Machine Works, 3 B. T. A. 745, in which case certain bad debts were charged off on the books as of December 31,1918, after the books had been closed for the year and ruled down. The facts of that case are clearly different from the facts in the instant case. It seems that in that case the petitioner charged off a certain debt after its books had been closed and the entry was made as the first entry in 1919 dated December SI, 1918. In that case the Board held that there was a substantial compliance with the requirement that the amount be charged off within the taxable year. In this case, the actual charge-offs were made on March 16, 1920, and were so dated. They do not purport to be as of December 31, 1919; furthermore, the balances as actually charged off include interest for January, 1920. If these accounts had been charged off as of December 31, 1919, and included in the business for that year, although the physical act of charge-off was not performed within that year, but within a reasonable time thereafter, there would have been a sufficient compliance with the statute. Appeal of A. W. Blackie, 2 B. T. A. 747. But that is not this case.

Considering the clear and unmistakable provisions of the statute, the decided cases thereunder, and the testimony adduced at the hearing, we are of the opinion that there has not been a sufficient compliance with the provisions of section 214 (a) (7) to warrant a conclusion that these debts were ascertained to be worthless and charged off within the taxable year 1919. The findings of the respondent with respect to this issue are affirmed.

The second question raised by the pleadings is whether the petitioner, who has been compelled to pay not only his pro rata share of the partnership’s indebtedness upon dissolution, but the pro rata share of his partner, is entitled to deduct his partner’s share in the computation of his individual taxes for the year 1919.

In the return of the partnership for the year ended December 31, 1919, a deduction of $96,224.05 was claimed as bad debts of the partnership, which amount consisted of the totals of the Smith accounts hereinabove referred to, the $63,038.20, and the following:

W. O. Cunningham_$15, 448.49
J. H. McGovern_ 5, 978.84
Sam I. Perlman_ 934. 00
Blaisdel, guaranteed_ 3,425.28
Syndicate account_ 1, 500. 00
Newark losses_ 5, 899.24
33,185.85

As has been stated hereinbefore, the respondent disallowed the sum of $63,038.20, the amounts of the Smith accounts, because these accounts had not been found to be worthless and charged off within the year 1919, but he did allow, for reasons which we do not know and which are not material to the proper consideration of the issue raised here, the sum of $33,185.85. The Newark losses of $5,899.24 included in the sum allowed by the respondent, having been borne by Miller, the manager of the Newark office, in accordance with the partnership agreement, we must reduce the sum of $33,185.85 by that amount in arriving at the figure which raises the present issue in controversy, or the amount of $27,286.61. Of this latter amount the respondent has allowed the petitioner to deduct 35-55ths in the computation of his individual income for the year 1919, leaving a balance of 25-55ths which would ordinarily be deductible by Muller as Ms share of the losses of the New York office. It is well to point out at this juncture that there is some conflict in the record as to whether Muller’s percentage was 20 per cent or 25 per cent — the testimony shows 25 per cent. The petitioner contends that he should not only be allowed to deduct 35-55ths of $27,286.61 in the computation of his personal income for the year 1919, but that because of the failure of Muller to bear his portion of this loss, he should be permitted to deduct an additional 25-55ths, or Muller’s share.

Because of the indefiniteness of the pleadings we are not certain whether petitioner relies upon subsection 4 or 7 of section 214 of the Revenue Act of 1918; we must, therefore, first determine whether this alleged loss is an ordinary one incurred in the trade or business and therefore deductible under the provisions of subsection 4 of the Act aforesaid or whether it is a debt and governed by the provisions of subsection 7, of that Act.

Section 214 (a) (4) of the Revenue Act of 1918 is as follows:

(a) That in computing net income there shall he allowed as deductions. *******
(4) Losses sustained during the taxable year, and not compensated for by insurance or otherwise if incurred in trade or business.

The word “ loss ” has been variously defined to mean “ deprivation, etc.,” vol. 5 Words and Phrases, 1st Series 4232. Webster’s Dictionary defines the word “loss” to be; 1. State or fact of being destroyed; ruin; perdition; as, the loss of a vessel at sea. 2. Act or fact of suffering deprivation; esp., the unintentional parting with something. 3. Act or fact of failing to win or utilize, or the resulting state; as the loss of a race. 4. That which is lost; specif., waste. The word “ debt ” on the other hand, has been defined to mean “ that which is due from one person to another, whether money, goods, or services; that which one person is bound to pay to another, or to perform for Ms benefit; that of which payment is liable to be exacted ; due; obligation; liability.” And again it has been defined to include “ any sort of obligation to pay money.” The word “ debt ” has been defined to mean “ every claim and demand upon which a judgment for a sum of money, or directing the payment of money, could be recovered in an action.” Yol. 2 Words and Phrases, 1st Series 1864^66.

A loss and a worthless debt may under certain circumstances amount to the same thing if the debt is charged off within the time prescribed by the statute. United States ex rel. Ray v. Porter, 19 Fed. (2d) 541.

It is a general rule of law that so long as a partnership continues one partner can not maintain an action at law against the firm or against a copartner on account of matter connected with the partnership, and further that this disability continues until there it á settlement of the accounts between the partners although there may have been a dissolution of the partnership, but it has been held that if the equivalent of a judicial accounting has been had or an accounting is rendered useless, a suit may be maintained without it. 20 R. C. L. 925.

It seems clear to us that although no accounting had been rendered between the partners here and that therefore an action at law in assumpsit would not ordinarily lie as between the partners for the amount of the existing obligation, such an accounting was utterly useless in this case. At any rate, an accounting was never insisted upon by either of the parties, so far as we are able to determine. Therefore, it appears clear to us that when the petitioner paid the obligations of the firm, the portion which should have been borne by his junior partner became a debt as between them, and was recoverable by an action at law in assumpsit. Therefore, finding as we do that this is a debt, it is governed by the provisions of section 214 (a) (7) of the Revenue Act of 1918, supra.

Let us therefore determine whether the two tests laid down by the statute have been complied with. It appears from the testimony that after dissolution of the firm, Muller was employed by another brokerage firm as a clerk, with which firm he was employed at the time of the hearing. In 1920 petitioner tried to get an understanding with him but failed to do so. In 1923 petitioner endeavored to collect something from Muller, which resulted in bankruptcy for the latter, but petitioner failed to recover anything. At the time of dissolution it appears that no agreement was made between the petitioner and Muller for the settlement of the firm’s debt. It further appears that the petitioner was making an effort to recover from Muller up to 1923, when the latter was forced into bankruptcy. If this debt became worthless in 1919, we are unable to find any satisfactory evidence of that fact in the record. The record is wholly silent with respect to the question of an actual charge off.

Finding that the amount of the firm’s obligations paid by the petitioner which should have been borne by Muller created a debtor-creditor relationship between them, and believing as we do that the evidence does not disclose the ascertainment of the worthlessness of this debt, nor the charging off thereof within the taxable year 1919, we are of the opinion that the deduction claimed is not allowable.

Reviewed by the Board.

Judgment will be entered for the respondent.

TRUssell, Green, and Arundell dissent on the second point.


author: Marquette :

text:
    E. T. Bamert, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3227.
    Promulgated October 31, 1927.
    Inventory values fixed by going prices at taxpayer’s own market ratber than one at a distance.

      H. H. Tooley, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
    This proceeding is for the redetermination of income taxes for the years 1917,1918, and 1919 in the amounts of $798.45, $534.84, and $14.87, respectively. The deficiencies are based upon a disallowance by the respondent of the inventory values placed by petitioner upon his property.
    FINDINGS OF FACT.
    Petitioner was a sheep grower in San Joaquin County, California. In making his returns for the years in question, he inventoried his ewes by the farm-price method and used the price per head prevailing in San Joaquin County at the close of each year. The Commissioner’s valuation was based upon values of sheep in neighboring States of the northwest.
    The market values of ewes, per head, at petitioner’s market for the periods involved were: December 31, 1916, $20; December 31, 1917, $20; December 31,1918, $20; and December 31, 1919, $13.
   OPINION.

Marquette :

The only question here involved is whether petitioner, in making up his tax returns for the years in question, is to inventory his ewes at prices obtained in his county and thereabouts, or whether he must follow the values fixed by the Commissioner and taken from other States and somewhat distant localities.

We are of the opinion that the petitioner was right, and the Commissioner wrong, as to the basis of inventory prices.

Three witnesses testified in support of the petitioner. All were experienced in raising, buying and selling ewes in and near San Joaquin County. Their testimony showed that the fair market price for ewes, in that locality, was from $20 to $22 in December, 1917; $20 to $25 in 1918, and $10 to $14.25 in 1919. This testimony was not contradicted.

It is not clear from the record just what localities were meant in the Commissioner’s deficiency letter, in which it was stated that the values which he would apply were derived from “ inventory values of sheep, * * * in neighboring States of the northwest.” It might perhaps be inferred, from some of the questions on cross-examination, that Montana and Idaho were the northwestern States referred to. But that is not material. Petitioner was located in, or near, central California. There he bought and sold his sheep. That locality was his market, and it is by the prices of that market, and not some distant one, that the value of his goods should be fixed. Those prices and values petitioner has fairly established by the testimony. On the basis of those prices his valuation, per head, of his ewes was correct, and the inventories in question should be computed by using the prices claimed by the petitioner as set out in the findings of fact.

Judgment will be entered on 15 days’ notice, wider Buie 50.

Considered by Phillips, Milliken, and Van Fossan.


author: Maequette :

text:
    Daniel S. Markowitz, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 20287.
    Promulgated October 31, 1927.
    1. Computation of the petitioner’s excess-profits tax for tbe year 1920 under section 302 of tbe Revenue Act of 1918, approved.
    2. Deductions for exhaustion, wear and tear of property used in the trade or business allowed.

      Herbert GhoynsM, 'Esq., for the petitioner.

      Thomas P. Dudley, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1920 in the amount of $2,102, which the respondent, under section 280 of the Revenue Act of 1926, has asserted against the petitioner and Morris L. Markowitz, Abe N. Jackson and Edward Harris, as additional tax liability of the Crescent Theatres, Inc., of which they are stockholders. The petitioner alleges that the respondent erred in disallowing a deduction of $2,750, taken as an allowance for the exhaustion, wear and tear of property owned by the Crescent Theatres, Inc., and in computing the excess-profits tax under section 302 of the Revenue Act of 1918 instead of under section 301 of that Act.
    FINDINGS OF FACT.
    The petitioner is and was during the year 1920 a stockholder of the Crescent Theatres, Inc., a corporation which was organized in the year 1919 for the purpose of leasing and operating moving picture theatres. The record does not disclose the authorized capital of the corporation, the amount of stock actually issued or the ámount of money or other property paid in by the stockholders.
    In August, 1919, the Crescent Theatres, Inc., obtained a 10-year lease on the Lodi Theatre at Lodi, Calif., and at the same time purchased the furniture, carpets, chairs, motion picture machines and other equipment of the theatre from the former proprietor thereof for $17,500, which was paid in 10 monthly installments of $1,750 each. In the same year it acquired a 10-year lease on the Bijou Theatre at. Fresno, Calif., paying in addition to the annual, or monthly rental, a bonus of $2,500. It also purchased the furniture and other equipment of the theatre for $10,000. In the year 1919 the Crescent The-atres, Inc., also purchased a lease on the Crescent Theatre at San Francisco, and the furniture and equipment in the theatre for $10,000. The lease at the time it was so acquired had about nine years to run. In September or October, 1919, the Crescent Theatres, Inc., acquired a lease on the Verdi Theatre in San Francisco, for a .term of ten years, and also purchased the furniture and other equipment of the theatre for $65,000, of which $25,000 was paid in cash and $40,000 by notes for $750 each, one of which was payable each month thereafter. In addition to the expenditure mentioned, the Crescent Theatres, Inc., installed a new organ in the Verdi Theatre at a cost of $9,000. When the several theatres and the equipment thereof were acquired by the Crescent Theatres, Inc., the purchase price was furnished by the stockholders of the corporation. The record does not disclose whether the organ subsequently installed in the Verdi Theatre was paid for with money furnished by the stockholders, or out of earnings.
    The lease on the Lodi Theatre and the equipment therein were sold by the Crescent Theatres, Inc., in the year 1920 for $30,000. The other assets of the corporation were either sold or transferred to the stockholders subsequent to 1920.
    The Crescent Theatres, Inc., in its income and profits-tax return for the year 1920 reported a profit of $9,500 on the sale of the Lodi Theatre, and deducted $2,750 for the exhaustion, wear and tear of the assets of the corporation. It computed its invested capital as $92,500 and its tax liability as $957.97. The respondent disallowed the deduction taken for exhaustion, wear and tear, and did not use any invested capital in determining the excess-profits tax, but computed it under section 302 of the Revenue Act of 1918 and determined a deficiency of $2,102.
   OPINION.

Maequette :

The position of the parties to this proceeding may be stated in a few words. The petitioner contends that the invested capital of the Crescent Theatres, Inc., for the year 1920 was at least $70,450, which should be taken into consideration in computing its excess-profits tax, and that the amount of $2,750 is a reasonable allowance for the exhaustion, wear and tear of the corporation’s assets in that year. The respondent denies that he erred in computing the excess-profits tax of the corporation, or in disallowing the deduction taken for depreciation, and he further contends that the corporation understated in its return, the profit realized from the sale of the Lodi Theatre.

The evidence relative to the invested capital of the Crescent Thea-tres, Inc., is vague and indefinite and insufficient to warrant us in finding that there was in fact any invested capital. There is no evidence as to the amount of capital stock either authorized or issued or the amount or value of money or other property, if any, paid in by the stockholders when the corporation was organized. The only witness introduced was the petitioner, Daniel S. Markowitz, and his testimony as to this issue is that the money used by the corporation to purchase the several theatre leases and equipment was furnished by the stockholders. “We each paid in so much money every time there was a purchase of any size made.” He did not say whether the money so furnished was paid in for stock, as paid-in surplus, or was advanced as loans. In view of the state of the record as to the corporation’s invested capital, we do not feel justified in disturbing the respondent’s determination.

The evidence relative to depreciation convinces us that the Crescent Theatres, Inc., acquired in Í919 assets costing at least $114,000. The useful life of these assets is not definitely shown but we are satisfied that, considering the evidence and the nature of the assets and their cost, an annual deduction of $2,750 for their exhaustion, wear and tear is not excessive and should be allowed.

The evidence also established that the corporation purchased the Lodi Theatre lease and equipment in 1919 for $17,500, and sold it the following year for $30,000. The profit realized from the sale was therefore the difference between the depreciated cost and the sale price, instead of $9,500, the amount reported by the corporation.. The corporation’s income should be adjusted accordingly.

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

Considered by Phillips, Milliken, and Van Fossan.


author: Marquette:

text:
    Planters Warehouse Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11956.
    Promulgated October 31, 1927.

      W. A. Slaton, Esq., for the petitioner.

      Le Roy L. Eight, Esq., for the respondent.
   Marquette:

This proceeding is for the redetermination of deficiencies in income and profits taxes for the fiscal years ending July 31, 1920, and July 31, 1921, in the total amount of less than $10,000.

FINDINGS OE FACT.

The petitioner is a Georgia corporation with its principal office and place of business at Washington, Ga., and it is and was during the years 1919, 1920, and 1921 engaged in operating a cotton warehouse at that place. It is and has been for many years the custom of the petitioner to open up a new set of books of account on August 1 of each year, and to transfer to the new books the balances of accounts in the prior years’ books which were considered good, and to leave in the prior years’ books all accounts which were considered worthless and uncollectible. This practice was followed in the years 1919,1920, and 1921. The petitioner’s books were kept on the cash receipts and disbursements basis.

In the year 1911 a fund of $50,000 was raised by the town of Washington, Ga., to procure an extension of the Elberton & Eastern Railroad from Tignall to Washington, Ga. The petitioner was desirous of having the extension built as it would give the petitioner a connection with railroads running north and would bring it cotton business that it had theretofore been unable to acquire or handle on account of lack of proper railroad connections. The petitioner thereupon subscribed $1,000 to the fund mentioned, for which it received a $500 first mortgage bond of the railroad, the other $500 so subscribed being used to help pay for the railroad right of way. The $500 of the subscription not represented by the bond was charged by the petitioner to expense and was deducted in computing its net income for the calendar year 1920. The record does not disclose when the payment was actually made.

The petitioner filed income and profits-tax returns for the calendar years 1919, 1920, and 1921. The return for 1920 showed a tax liability of $391.50 and the return for 1921 showed a net loss. The record does not disclose what, if any, income and tax liability it reported for the year 1919.

The respondent, upon audit of the petitioner’s return for the year 1920, disallowed as a deduction from gross income the amount of $500 paid to the Elberton & Eastern Railroad as above set forth, disallowed a deduction claimed on account of certain bad debts, and determined that additional tax was due in the amount of $1,041.72, which additional tax was assessed in January, 1924. The respondent subsequently made an examination of the petitioner’s books of account and determined that they were kept on the fiscal-year basis and that its income and profits-tax returns should have been made for fiscal instead of calendar years. He therefore computed the petitioner’s income and profits-tax liability for the fiscal years ending July 31,1920, and July 31,1921, and determined that it was $1,259.89 for the fiscal year ending July 31, 1920, and $124.54 for the fiscal year ending July 31, 1921. The tax theretofore assessed for the calendar year 1920 was credited to the fiscal year ending July 31, 1920, and the excess of such tax, amounting to $173.33 was reported as an overassessment and was abated. The deduction claimed by the petitioner on its return for the calendar year 1920 on account of bad debts was allowed by the respondent in determining the income for the fiscal years mentioned, but the deduction claimed on account of the contribution to the Elberton & Eastern Railroad was not allowed.

Judgment will be entered for the respondent.

Considered by Phillips, Milliken, and Van Fossan.


author: MaRquette:

text:
    Bisso Ferry Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11269.
    Promulgated October 31, 1927.

      A. A. Moreno, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
   MaRquette:

This proceeding is brought by the petitioner, the Bisso Ferry Co., Inc., for the redetermination of deficiencies in income taxes in the total amount of $2,611.06, asserted by the respondent against the Bisso Ferry Co. for the years 1917 to 1920, inclusive.

The evidence, all of which need not be set forth here, discloses that the petitioner was incorporated on August 12, 1921, under the laws of the State of Louisiana, at which time it acquired certain ferry boats and ferry franchises then being operated by the Bisso Ferry Co. The petitioner alleges in its petition, and contended at the hearing, that the Bisso Ferry Co. was a branch of the Bisso Tow Boat Co., a corporation; that the Tow Boat Co. was in fact the owner of the ferries and franchises operated by the Bisso Ferry Co., and that the income and capital of the Bisso Ferry Co. for the years 1917 to 1920, inclusive, should be included in the income and capital of the Tow Boat Co. The respondent admits that the petitioner was not incorporated until August 12, 1921; and that the Bisso Ferry Co. was not a corporation either de jure or de facto, but contends that it was an association taxable as a corporation under the Revenue Acts of 1917 and 1918.

There is nothing in the record herein to show that the respondent claims that the tax in question is an obligation of, or that he will attempt to collect it from the petitioner. The tax is asserted against the Bisso Ferry Co., which the respondent admits was a separate entity from the petitioner and not a corporation either de jure or de facto, and so far as the record shows there has been no attempt by the respondent to assert the tax against the petitioner as a transferee of the Bisso Ferry Co. Neither the Bisso Ferry Co. nor any of the individuals interested therein have appealed from the deficiency letter. In the absence of an appeal by the party or parties against whom the deficiency is asserted, we can not, at the request of the petitioner, determine their liability for the taxes involved herein, merely because the petitioner is apprehensive that the respondent may hereafter attempt to collect the tax from it in some other tribunal. We are of opinion that there is no valid appeal pending before us herein and this proceeding is therefore dismissed.

Order of dismissal will he entered accordingl/y.

Considered by Phillips, Milliken, and Van Fossan.


text:
    Alexis R. Paxton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7175.
    Promulgated October 31, 1927.
    The pay of an officer on the retired list of the Regular Army of the United States is not exempt from taxation under section 213(b)
    (9) of the Revenue Act of 1921, as a pension for services in the military or naval forces of the United States in time of war.

      Alexis B. Paxton pro se.

      A. George Bouchard, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income tax for the years 1921, 1922, and 1923 in the amounts of $20.31, $75.32, and $58.53, respectively.
    - FINDINGS OE FACT.
    The petitioner is an individual residing in Marin County, California. On March 3, 1877, he was commissioned a second lieutenant in the Regular Army of the United States and served continuously as an officer therein, both in peace and war, until March 7, 1913, when he was retired from active service with the rank of Colonel and placed on the retired list of the Regular Army of the United States, with the pay provided by law for retired officers of his rank and length of service, and'he received such retired pay during each of the years 1921, 1922, and 1923.
    In his income-tax return for the year 1921 the petitioner included in gross income his pay for that year as a retired officer of the Regular Army of the United States, but did not include his retired pay for 1922 and 1923 in his returns of income for those years. The tax paid by the petitioner on his retired pay for 1921 was refunded to him but the respondent, upon audit of the petitioner’s returns for 1921, 1922, and 1923, restored such retired pay for 1921 to income for that year and also added the petitioner’s retired pay for 1922 and 1923 to his income for those years and determined deficiencies in the amount of $20.31 for 1921, $75.32 for 1922, and $58.53 for 1923.
   OPINION.

Marquette :

The facts in this proceeding are not in dispute and the only question presented for determination is whether the compensation or pay received by the petitioner during the years 1921, 1922, and 1923, as a retired officer of the Regular Army of the United States, is subject to the Federal income tax. The petitioner claims it is a pension for service in time of war and is exempt from taxation under section 213(b) (9) of the Revenue Act of 1921, which provides that gross income “ Does not include the following items, which shall be exempt from taxation under this title: * * * (9) Amounts received as compensation, family allotments and allowances under the provisions of the War Risk Insurance and the Vocational Rehabilitation Acts, or as pensions from the United States for service of the beneficiary or another in the military or naval forces of the United States in time of war.”

Section 210 of the Revenue Act of 1921 provides that a tax at the rates therein prescribed shall be levied, collected and paid on the net income of every individual in excess of the credits provided by section 216 of that Act. By section 213 all amounts received from certain sources therein enumerated are exempt from taxation and are not included in income as defined by the Act. It seems clear, therefore, that all income from whatever source derived, not specifically exempt, is included within the scope of a taxing act, unless by reason of some Constitutional or legal inhibition it may not be reached by the taxing power of the United States. We therefore hold that unless the petitioner comes within the exemption provided by section 213, the tax herein must be sustained.

Upon consideration of the facts and the arguments presented in support of the petitioner’s contention, we must conclude that the petitioner’s pay as a retired officer in the United States Army is not a pension for services in the military or naval forces of the United States in time of war within the meaning of section 213 (a) (9) of the Revenue Act of 1921. Every officer of the United States Army who does not resign or die, will sooner or later be retired for age, disability or length of service, and paid the retired pay to which his rank and service at the date of retirement entitle him, unless as the result of misconduct or inefficiency he is dismissed or discharged. However, the pay he receives as a retired officer is not a pension such as is contemplated by the section of the law above quoted. A retired officer is still in the Army but on the inactive list and is subject to military law and regulations as when on active duty, and may even be recalled to active duty should occasion require. Sec. 1250, Revised Statutes; United States v. Tyler, 105 U. S. 244; Wood v. United States, 107 U. S. 414; Kahn v. Anderson, 255 U. S. 1. In United States v. Tyler, supra, we find this language:

There is, therefore, a manifest difference in the two kinds of retirement, namely, retiring from active service and retiring wholly and altogether from the service * * * In the former case the compensation is continued at a reduced rate and the connection is continued, with retirement from active service only.

A retired officer receives the retired pay whether his active service was in peace or war, whether he retired for age after a long and strenuous career on the battlefield, or within a month after he was commissioned for some physical disability not even remotely connected with war. 'The petitioner receives pay as a retired officer of the Army, not because he served in time of war but because he served until he arrived at the age provided by law for his retirement from active duty. He would have retired at the same age and date and would draw the same retired pay if his whole active service had been spent in an era of continuous peace. In our opinion the petitioner’s claim for exemption must be denied.

Judgment will be entered for the respondent.

Considered by Phillips, Milliken, and Van Fossan.