author: Littleton:

text:
    Rose D. Forbes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10236.
    Promulgated June 7, 1927.
    The American School Citizenship League was during the year 1921 an association organized and operated exclusively for educational purposes and a contribution of $4,000 made thereto by petitioner in 1921 was a proper deduction from gross income.

      Kenneth Howes, Esq., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    The Commissioner determined a deficiency in income tax of $1,358.69 for the calendar year 1921. He held that the American School Citizenship League, to which petitioner made a contribution of $4,000, was not operated exclusively for educational purposes and disallowed the contribution made by petitioner as a deduction from her gross income, and this action on his part is assigned as error.
    FINDINGS OP PACT.
    Petitioner is a resident of Milton, Mass. In the year 1921 she contributed $4,000 to the American School Citizenship League, which is a voluntary unincorporated association organized in 1908 by a group of individuals. It is an allied organization of the National Educational Association and in 1921 the National Educational Association appointed a committee to cooperate with the American School Citizenship League in carrying on its activities. The object of the American School Citizenship League, as expressed in article 1 II of its constitution, is “ To develop an American citizenship which j will promote a responsible world democracy and a real cooperation 'among the nations.” Its constitution provides as officers a president, two or more vice presidents, a secretary, a treasurer, and a body of fifty or more counsellors, such officers constituting the board of managers of the League. This board elects from its number ten persons who, with the president, secretary and treasurer, constitute the executive committee. The board of managers meets once a year. Eegular meetings of the executive committee are held and special meetings may be called from time to time. The League has a counsel consisting of approximately one hundred persons engaged in educational work throughout the country. Persons who make annual contributions of $25 or more are enrolled as members of the League. Other persons who may make a contribution at any time in excess of $25 are enrolled as patrons. • The association has no stockholders. It has no income except such as is derived from public contributions or from members and small sums realized from its publications.
    The League has branch organizations in various States, which it designates as State Teachers’ Associations. These branch organizations are composed of various state board educational officers and teachers.
    In the interest of education and to aid teachers throughout the country in the more efficient distribution of their duties, as such, .the League has had prepared by its members and officers a number of books which have been published by the League and are exclusively used in schools. An “American Citizenship Course in United States History ” and a “ Course in Citizenship and Patriotism ” are so prepared and published, and used by adoption of many States in public schools. “ The studies included in these volumes are an attempt to find materials in American history that can be presented to the American Y' child in such a way as to produce a definite result, — a result that will be evidenced in a better understanding of our National life, a' l^truer sense of historical value, a keener appreciation of our international obligations, and a nobler conception of American citizenship.”
    The American School Citizenship League was organized and during the year 1921 was operated exclusively for educational purposes. No part of the net earnings of the League inured to the benefit of any private stockholder or individual.
    Petitioner’s net income for the year 1921 computed without the benefit of the deductions allowed by section 214 (a) (11) of the Revenue Act of 1921 amounted to $62,974.45. The contribution of $4,000 by her to the American School Citizenship League, together with all other charitable contributions made by her in the year 1921 totaled less than 15 per cent of her net income for that year.
   OPINION.

Littleton:

From the evidence submitted, the Board is of the opinion that the American School Citizenship League was during the year 1921 an association organized and operated exclusively for educational purposes. No part of the net earnings of the League inured to the benefit of any private stockholder or individual. The contribution of $4,000 made by petitioner to this League in the year 1921 was therefore a proper deduction from her gross income.

Judgment will be entered on lb days1 notice, under Bule 50.


source: Caselaw Access Project

license: Public Domain

text:
    John W. Hart, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3916.
    Promulgated June 7, 1927.
    t March 1, 1913, value of 197% acres of land determined to have been $275 an acre.

      D. Loga/n Gvffin, Esq., and LeBoy L. BacoJms, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
    The Commissioner determined deficiencies in income tax aggregating $657.03 for the calendar years 1920 and 1921. He determined that 197% acres of land and coal rights sold by petitioner in 1920 for $325 an acre had on March 1, 1913, a fair market value of $250 an acre. Petitioner claims that the fair market value of this land and the coal rights on March 1, 1913, was $275 an acre.
    FINDINGS OF FACT.
    Petitioner is a resident of Auburn, Ill. In 1890 he purchased 203% acres of farm land near the City of Auburn on which was located a dwelling house and the necessary farm buildings.
    Between 1904 and 1913 petitioner expended $2,030 in draining and otherwise improving the farm. Since 1904 this land bordered on the northwest limits of the City of Auburn and was underlaid with a seam of coal 7 to 8 feet in thickness. In 1904 petitioner platted a portion of this property into city lots 80 by 147 feet. The inside lots were sold for $225 and the corner lots for $250 each. About the same time he platted -a second addition, a part of which he sold at $450 an acre. In all 6 acres were sold from the two subdivisions, leaving 197% acres.
    In 1913 or 1914 a coal-operating company, engaged in the mining of coal about one-half mile north of petitioner’s property, offered to pay him $75 an acre for the coal rights underneath his farm of 197% acres. Petitioner declined to accept this offer. All of the 197 acres consisted of fertile farm land. In 1912 the coal rights beneath certain land similar to the land owned by petitioner and located one-half mile south of the active mining operations sold for $50 an acre. Subsequently in 1913 or 1914 the owner of this land, although it did not adjoin the city limits of Auburn and was not therefore as valuable as petitioner’s property for subdivision purposes, sold- the surface rights for $275 an acre. Another farm of about 80 acres, comparable to the land owned by petitioner and located one-half mile west of the city limits of Auburn, was sold in 1915 for $265 an acre. The fair market value of petitioner’s 197% acres of land, together with the mineral rights, on March 1, 1913, was $275 an acre.
   OPINION.

Littleton:

The only issue in this proceeding is the value on March 1, 1913, of petitioner’s 197% acres of land and the mineral rights.

Petitioner is a man beyond 84 years of age and has been familiar with farm lands in the vicinity of Auburn practically all of his life. He testified that the fair market value of the 197% acres of land and the coal rights on March 1, 1913, was $275 an acre. Two other witnesses who were familiar with land values in that vicinity in 1913 testified that this property, considering the mineral rights and its availability for subdivision purposes, was well worth $275 an acre on March 1, 1913. One of these witnesses was the owner of certain land one-half mile from the city limits of Auburn, and comparable in fertility and in mineral contents to the land of petitioner. In 1912 he sold the mineral rights in his land for $50 an acre and surface rights in 1914 for $265 an acre.

The Board is of the opinion that the evidence submitted fully sustains petitioner’s claim that the 197% acres of land had on March 1,1913, a fair market value of $275 an acre, and we have so found.

Judgment mil be entered on 15 days' notice, under Bule 50.


author: Smith :

text:
    B. S. Catlett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12032.
    Promulgated June 7, 1927.

      Reuben Ragland, Esq., for the petitioner.

      Henry Ravenel, Esq., for the respondent.
   Smith :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1923 in the amount of $324.26. In 1923 the petitioner sold 91 shares of capital stock of Consolidated Naval Stores Co. at $180 per share. Most of this stock was acquired by the petitioner in 1908 or 1909. The petitioner has no record and no recollection as to the amount paid for the stock. The fair market price or value of the stock on March 1, 1913, was at least $240 per share. The petitioner contends that he sustained a loss upon the sale of the stock in 1923 of the difference between the sale price of $180 per share and the March 1, 1913, value of $240 per share. The respondent has disallowed the claim by reason of the fact that there is no evidence that the cost of the stock to the petitioner was less than the selling price in 1923.

Judgment will be entered for the respondent.


author: Smith:

text:
    Connorized Music Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7179.
    Promulgated June 7, 1927.
    Cost of goods sold for the year 1920 as computed by the Commissioner increased in the total amount of $16,958.73, representing purchases during that year.

      Arthur Gonrow for the petitioner.

      William H. La/wder, Esq., for the respondent.
    This proceeding is for the redetermination of income and profits taxes for the years 1920 and 1921. The Commissioner asserts that for 1920 there is a deficiency of $11,111.07, and for 1921 a deficiency of $1,410.37, making a total deficiency of $18,521.44. The petitioner alleges that the Commissioner erred in that he failed (1) to include certain expenditures in computing the cost of goods sold, and (2) to allow a credit of 8 per cent of invested capital in computing the excess-profits tax.
    FINDINGS OF FACT.
    Petitioner is a New York corporation with its principal office at New York City, and is engaged in the manufacture of player-piano rolls. In computing cost of goods sold for each of the years 1920 and 1921 it deducted from the total amount paid for goods during the year the amount owing for goods as at the beginning of the taxable year and added to the figure thus ascertained the amount owing for goods as at the close of the taxable year.
    It kept a sales ledger on the accrual basis and reported sales for each of the taxable years in accordance therewith. The Commissioner adopted the gross sales returned by petitioner in his computation of its income for each of the years under review. Petitioner did not keep a purchase ledger, but kept a purchase record book in Avhich it entered payments made for merchandise.
    Some of the invoices for goods purchased were lost and in computing the cost of goods sold for each of the years 1920 and 1921 the Commissioner used only those items appearing on the purchase record for which the petitioner could produce supporting bills. The amount allowed by the Commissioner was $24,503.12. The actual cost was $36,296.06.
    Checks showing payments for merchandise were produced at the hearing by the petitioner as follows:

    Petitioner did not have invoices to support any of the above checks.
    Expenditures for freight and cartage were entered by petitioner in its cash book and in a number of instances such expenditures were entered as incidental expenses. Estimated expenditures for freight and cartage were included by petitioner in computing cost of goods sold for each .of the years 1920 and 1921. The Commissioner allowed only those items for freight and cartage for which supporting vouchers could be shown.
    The petitioner did not produce at the hearing either its sales ledger, its purchase record book, or its cash book.
    The Commissioner computed the excess-profits tax for each of the years 1920 and 1921 under the limitation provisions of section 302 of the Revenue Acts of 1918 and 1921, respectively.
   OPINION.

Smith:

The second allegation of error will be disposed of first. No evidence having been submitted by the petitioner from which the Board could determine the amount of its invested capital, the action of the Commissioner in computing its excess-profits tax for the years 1920 and 1921 under the provisions of section 302 of the Revenue Acts of 1918 and 1921, respectively, is approved.

To support the first allegation of error, the petitioner submitted certain invoices, checks, and check stubs. It claimed that the invoices covered advertising expense incurred in 1920, but paid for in 1921, and merchandise purchased in 1921, some of which was paid for in 1922, but none of which appeared on its books for 1921. It also claimed that the Commissioner allowed the advertising expense as a deduction in 1921, whereas it should have been allowed in 1920. The petitioner, however, did not submit any evidence to show what the Commissioner’s action was with respect to the items covered by such invoices; whether he allowed any or all of the items and, if so, whether the allowance was made in computing income for 1920 or for 1921. Neither did it submit its books nor any memoranda drawn from its books and records at the time it prepared its returns which might have reflected the composition of its accounts, or its financial status. Consequently, we can not allow any of the items covered by the invoices in this redetermination.

Testimony relative to the canceled checks presented by petitioner through its witness Conrow -was adduced at the hearing as follows:

The Member. What are all of those canceled checks? You have more than two there?
Mr. Conrow. Oh, yes; there are a number of them. They run up here monthly, there are six checks here from the same company, running from February 1st to July, 1020.
The Member. Most of those that were paid in 1920 were for goods purchased in 1920?
Mr. Conrow. Xes, sir; those after January were for goods purchased for 1920, in 1920 but some of those for November and December of 1919 were paid in January, 1920. We discount these bills and paid those for December in January, and those for November in December.
Mr. Lawder. If your Honor, please, it seems as though, of necessity, this proceeding is just a trifle informal and I would like to ask a question: Are you prepared to state under oath at this time that none of these checks which you show here and introduce are not in the amounts already paid for purchases appearing on your book?
A. They do appear on our books.
Q. Are you prepared to say absolutely at this time that none of those checks have been allowed as purchases by the revenue agent?
Mr. Conrow. Not on the amended return.
Mr. Lawder. How do you know?
Mr. Conrow. Because I presented the invoices to him and had no invoices for them.
Mr. Lawder. Are those checks for which you have no invoices s
Mr. Conrow. Yes, sir.
Mr. Lawder. Are you stating at this time that you are entitled to more for purchases in computing the cost of goods for 1920 than was allowed originally?
Mr. Conrow. Yes, sir.
Mr. Lawder. How do you know some of these checks were not included in the original computation made by the revenue agent?
Mr. Conkow. These particular checks were allowed in the original return because they were on our books as being paid.
Mr. Lawder. And then, upon a supplemental and different examination they were thrown out because they were not supported by invoices?
Mr. Conrow. Yes; and the reason they were not supported by invoices was because their sales records were either lost or destroyed, and when it came to 1924 we could not obtain the bills covering these amounts.

We are convinced, from the foregoing testimony, that the checks represent sums expended by the petitioner during the year 1920 for goods purchased during that year for which the Commissioner did not give it credit in computing the cost of goods sold, and that the cost of goods sold as computed by the Commissioner should be increased in the total amount of $16,958.73. The petitioner claimed that it paid freight and cartage in each year which was not allowed as a deduction'by the respondent, but presented no evidence relative thereto.

The propriety of the Commissioner’s placing the petitioner upon the accrual basis with respect to sales and upon the cash basis with respect to purchases might well be questioned, but the question was not raised by the pleadings and we can not determine from the record that he erred in that regard.

Judgment will he entered in accordance with the above decision, on %0 days’ notice, under Rule SO.


author: Teusselu :

text:
    M. S. C. Holding Corporation, and Affiliated Corporations, Petitioners, v. Commissioner of Internal Revenue, Respondent. 960 Park Avenue Co., Inc.; 115 Incorporated; 907 Fifth Avenue Co., Inc.; C. C. Corporation; and 550 Park Avenue Corporation, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 4620, 6978.
    Promulgated June 8, 1927.
    Affiliations. — Of the eight corporations involved in these two actions seven of such corporations are held to be affiliated and one held not affiliated with any of the others.

      Richard 8. Holmes, Esq., for the petitioners.

      J. Harry Byrne, Esq., for the respondent.
    This proceeding is taken from the Commissioner’s determination of deficiencies in income and profits taxes of the corporations and in the amounts following:

    The petition, Docket No. 4620, of the M. S. C. Corporation and the C. C. Corporation as to the year 1919, and the joint petition, Docket No. 6978, of the other petitioners, have been consolidated for the purpose of hearing and redetermination.
    The petitioners allege that the above-named corporations were during the years 1918, 1919, and 1920, affiliated with each other, and also with two other corporations known as the K. T. B. Realty Corporation and the 630 Park Avenue Co., Inc., and further allege that the Commissioner erred in disallowing such affiliation. The Commissioner has not asserted a deficiency against either of the two latter corporations, but counsel for the parties hereto have agreed that the eight corporations should be considered in this proceeding with respect to the question of affiliation.
    FINDINGS OF FACT.
    The eight real estate corporations, all of which since their organization have operated in New York City, were incorporated under the laws of the State of New York on the following dates:
    960 Park Avenue Co., Inc_April, 1913.
    630 Park Avenue Co., Inc_March, 1914.
    907 Fifth Avenue Co., Inc- July, 1916.
    M. S. C. Holding Corporation_ August, 1915.
    C. C. Corporation- May, 1916.
    550 Park Avenue Corporation_ May, 1916.

      K. T. B. Realty Corporation_ May, 1917.
    115 Incorporated_ April, 1919.
    With the exception of the K. T. B. Realty Corporation and 630 Park Avenue Co., Inc., the corporations were organized for the purpose of building and operating in New York City apartment houses designed by J. E. R. Carpenter, architect and builder. The K. T. B. Realty Corporation operated flats or small residences and was a subsidiary of the C. C. Corporation which held all of its stock except a few qualifying shares. The 630 Park Avenue Co. had no active business during the years in question, but held a mortgage on certain land it had owned and on which an apartment was built and operated by the C. C. Corporation, which had given the mortgage.
    J. E. R. Carpenter designed a distinctive type of apartment and he decided to build and operate apartment houses of this design and to incorporate each enterprise separately so that the failure of any one would not affect the success of the others. His plans were carried out, and the eight corporations are the result.
    The percentages of stockholdings in the various corporations during the years in question were as follows:

    Each enterprise was conceived, planned, financed, controlled and directed by J. E. R. Carpenter. He invited certain relatives, friends and employees to participate in the various enterprises with the understanding that he was to control and manage them. None of the stock of any of the corporations has ever been offered for sale on the open market. The group of persons whom J. E. R. Carpenter permitted by invitation to participate in his real estate operations, consisted of Mrs. M. S. Carpenter, his wife; Ernest M. Stires, his Drother-in-law; John H. Carpenter, his brother; and Francis R. Mayer, his brother’s business partner and his personal friend (none of these persons were engaged in nor had any detailed knowledge of the real estate business); Bertrand Capps, an employee in the office of J. E. R. Carpenter, who was in charge of all the books 6f the various corporations and was also secretary or treasurer, or sometimes both, of five or six of the group of corporations; R. B. Knowles, J. E. R. Carpenter’s attorney and also general counsel for the group of corporations; Mabel H. Knowles, wife of R. B. Knowles; George W. Yepson, a close personal friend of J. E. R. Carpenter and also at that time secretary of the Grinnell Plumbing Co., which installed plumbing in several of the group of buildings; Vanderbilt & Burden, who had an interest in the land on which the building at 907 Fifth Avenue, New York City, was erected and who acquired the stock as a consideration when the land was acquired by the corporation; G. H. Storm & Co., lumber dealers who supplied lumber for most of the buildings and especially for 907 Fifth Avenue — George H. Storm of that company was a friend of J. E. R. Carpenter; Joseph G. Siegel, a friend of J. E. R. Carpenter; George A. Kennedy, nominee of a Chicago bank which held the stock of Wells Brothers as a pledge — Wells Brothers were the contractors for the building at 907 Fifth Avenue and the stock held by them was purchased by J. E. R. Carpenter in 1921; A. Creekmore, an employee in the office of J. E. R. Carpenter and superintendent of all the group of buildings and in charge of the purchase of supplies, of repairs and alterations, and of renting the apartments; L. W. Stotesbury, a friend of J. E. R. Carpenter and the attorney who prepared the articles of incorporation of 115 Incorporated; M. C. Bouvier, brother-in-law of B. Ewing; A. P. Villa, close personal friend of B. Ewing; and B. Ewing, a builder and operating real estate man who was at one time a partner of J. E. R. Carpenter for the purpose of renting apartments.
    In each instance when J. E. R. Carpenter planned to build and operate an apartment house he outlined his plans to his relatives and friends and invited them to invest. Any of them having the ready money would turn it over to J. E. R. Carpenter with the understanding that he was to invest it in the building enterprise which he was to control and manage. None of the individuals invested with the purpose of buying certain shares of stock in a certain corporation, but instead, turned the money over to J. E. R. Carpenter with full confidence that he would use the money to their best interests. The stock held by Mrs. Carpenter was given to her by J. E. R. Carpenter. Practically all of the stock of the various corporations was held by J. E. R. Carpenter, his relatives by blood or marriage, and his and his brother’s close personal friend, Francis R. Mayer.
    The officers and directors of the various corporations were J. E. R. Carpenter’s relatives, close personal friends, or his employees. J. E. R. Carpenter was an officer and director in each of the corporations and actually controlled and directed all activities of each corporation. None of the other stockholders, officers or directors took any part in the management of any of the corporations. No stockholders’ or directors’ meetings were actually held during the years in question, and none was ever requested. J. E. E. Carpenter took such action as he deemed necessary and then directed his employee, B. Capps, or his attorney, E. B. Knowles, to draw up minutes of a stockholders’ or dii'ectors’ meeting expressing such action already taken and such minutes were sent to the various individuals, whose signatures were required by the by-laws, for their signatures. This method was provided for by the by-laws of the various corporations and was done as a matter of form for corporate records. These minutes were always signed by the individuals as a matter of course and without question as to the propriety of the action taken by J. E. E. Carpenter.
    All of the business of the various corporations was carried on in one office, that of J. E. E. Carpenter, and was performed by him and his employees. All of the buildings owned by the various corporations were managed by J. E. E. Carpenter as a single enterprise. He rented the apartments, collected the rents, paid all bills, took care of all repairs and alterations, and purchased in bulk the supplies for all the buildings. J. E. E. Carpenter employed and paid a general manager, A. Creekmore, for all of the buildings and the superintendent of each building reported to him. J. E. E. Carpenter also employed E. B. Knowles as general counsel for all the corporations and B. Capps, who was in charge of all the books of all the corporations. Capps’ salary was paid partly by Carpenter and partly by the various corporations. Each corporation had its separate books of account in which its rents were credited and its expenses debited. A central account known as the J. E. E. Carpenter Operating Account, upon which B. Capps and J. E. E. Carpenter were authorized to draw checks, was maintained for the purpose of paying all bills, pay rolls and operating expenses of all the corporations. Employees in any of the buildings were paid in cash by A. Creekmore, who was given a check on this central operating account.
    Checks were drawn against the accounts of the various corporations for expenses incurred and deposited to this central operating account from which all expenses were actually paid. In some instances the by-laws of the corporations required two signatures on their checks and where this was the case, J. E. E. Carpenter was always one of the officers of the corporation to sign and it was the custom to have the other officer sign twenty-five or fifty blank checks and turn them over to J. E. E. Carpenter for use as needed. In the instances where the by-laws of the corporations required only one signature, J. E. E. Carpenter was always the officer required to sign the checks. Where coal and other supplies were purchased in bulk by J. E. E. Carpenter, the various corporations were charged for the proportionate amounts actually received. All bills were sent to the office of J. E. R. Carpenter. A second account, known as the J. E. R. Carpenter Special No. 4, was also maintained, from which large payments for the corporations, such as interest, were made by check signed by B. Capps at times when J. E. R. Carpenter was out of the city and checks could not be drawn on the separate accounts of the corporations.
    From time to time the corporations made loans to .each other. The funds of one corporation were used by J. E. R. Carpenter for the purposes of another, and if these loans were only for a short period, no interest was charged. However, if the funds were used in aiding the construction of a new building or for some other purpose, and the loan was for a period of more than three or four months, then interest was charged. At times, the several corporations were overdrawn in their respective amounts in the J. E. R. Carpenter Special No. 4 Account, but no interest was charged on such overdrafts. During the years in question, J. E. R. Carpenter personally guaranteed a building loan obtained by one of the corporations from a source outside of this group of corporations.
    The stockholders of the various corporations had absolute confidence in the ability of J. E. R. Carpenter and, in fact, considered that they had invested in his business; they never questioned his actions nor called for a meeting or an inspection of the books during the years in question. J. E. R. Carpenter had complete actual control of the management of all the buildings owned by the various corporations, and received a commission of 3 per centum of the amount of the rents received. During the years in question, J. E. R. Carpenter Avas also engaged as an architect and builder for operations haifing no connection Avith this group of corporations, and in the furtherance of these outside interests he used the same office and employees.
    For the years 1918, 1919, and 1920, these eight corporations filed consolidated income and excess-profits-tax returns, claiming to be affiliated with each other within the meaning of section 240(b) of the Revenue Act of 1918. The Commissioner upon audit of the returns ruled that 960 Park Avenue Co., Inc., and 630 Park Avenue Co., Inc., were affiliated with each other and that C. C. Corporation and K. T. B. Realty Corporation Avere affiliated with each other, but that none of the other corporations Avere affiliated with either of the two groups nor Avith each other. It is from this determination that the petitioners have appealed.
   OPINION.

Teusselu :

With reference to the K. T. B. Realty Corporation and the 630 Park Avenue Co., Inc., the Board is without jurisdiction to determine their tax liability for any of the years here in question for the Commissioner has asserted no additional tax against them. However, for the purposes of this appeal, and for the sole purpose of determining whether a certain group of corporations were affiliated during the years 1918, 1919, and 1920, and further, the two corporations and the parties to this proceeding having consented thereto, the Board will join the two above-named corporations in this proceeding for the purpose of making a clear record of the transactions and facts involved.

The question before us is whether the eight corporations, whose names are set out in the findings of fact, were during the years 1918, 1919, and 1920, affiliated within the meaning of section 240(b) of the Revenue Act of 1918, which provides: 1

For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

It is apparent from the findings of fact that J. E. R. Carpenter, his relatives and Francis R. Mayer constituted the same interests. Each of the five individuals, J. E. R. Carpenter; Mrs. M. S. Carpenter, his wife; E. M. Stires, his brother-in-law; J. H. Carpenter, his brother; and Francis R. Mayer, his brother’s business partner and his own personal friend, did not hold the same amount of stock or even any stock in all of the eight corporations, but we are convinced that under the facts in this case that was not necessary.

All of these five persons joined in the several corporate enterprises here under consideration as joint adventurers and promoters of each and all of the corporate entities created by them. They are jointly and separately the same interests. The Board said in the Appeal of Rishell Phonograph Co., 2 B. T. A. 229:

When Congress said “ controlled by the same interests,” we believe it meant something broader than versons or individuals. If “ the same interests ” was intended to mean only “ the same persons,” it would have been easy for Congress, by using the latter term, to have avoided all ambiguity. When two persons are guided in their action by a common interest (in the objective sense), they frequently constitute a single interest (in the subjective sense).

The Board said in the Appeal of Germantown Braid Co., 3 B. T. A. 1336:

The “ same interests ” does not necessarily mean the same individuals. The relationship between the individuals and the facts and circumstances of the case should be considered in determining whether different individuals are in fact the “same interests.” Family groups owning stock in different corporations, under the circumstances of this case, may fairly be said to be the same interests.

In that case the percentages of stockholdings of the individuals varied in the two corporations involved. See also Appeal of Wright Cake Co., 2 B. T. A. 58.

Upon all of the facts contained in the record of these two actions, we are convinced that the M. S. C. Holding Corporation, 960 Park Avenue Co., Inc., 907 Fifth Avenue Co., Inc., C. C. Corporation, 550 Park Avenue Corporation, K. T. B. Realty Corporation, and 630 Park Ave. Co., Inc., are corporations substantially all of whose stock is owned and controlled by the same interests and, therefore, are entitled, under the provisions of section 240 of the Revenue Act of 1918, to make consolidated returns for purposes of income and profits tax and to have their tax liability determined upon the basis of such consolidated returns for each of the years 1918,1919, and 1920.

Respecting the corporation known as 115 Incorporated, the situation is somewhat different. There here appears to be a substantial minority interest sufficient to distinguish it from the other corporations here under consideration, and we are of the opinion that the income and profits tax liability of 115 Incorporated for the year 1920 must be determined upon the basis of its invested capital and income and that it is not affiliated with any other corporation.

The deficiencies may be redetermined in accordance with the foregoing findings of fact and opinion upon 15 days’ notice, pursuant to Rule 50, and judgment will be entered accordingly.

Phillips and MuRdock dissent.


text:
    Leo Schwartz, Petitioner, v. Commissioner of Internal Revenue, Respondent. Julius Rich, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8473, 8697.
    Promulgated June 8, 1927.
    1. Tire 25 per cent reduction provided by Title XII, Revenue Act of 1924, is applicable literally to the tax payable in 1924 shown on returns for 1923, and does not reduce the 1924 tax payable in 1925 of an individual partner whose 1924 taxable income is made up in part of a share of partnership income for a fiscal year beginning in 1923.
    2. In arriving at the “ earned income ” of a partner there shall be included in the partner’s share of the distributable profits of the partnership the salary received from the partnership, and not in excess of 20 per centum of such share of the profits may be considered as earned income.

      M. D. Cohen, G. P. A., for the petitioners.

      D. D. Shepard, Esq., for the respondent.

      These are proceedings for the redetermination of deficiencies in income tax for the year 1924 in the amount of $104.78 in the case of Leo Schwartz, and of $63.82 in the case of Julius Rich. The cases were consolidated for the purpose of decision. Each petitioner alleges error on the part of the Commissioner (1) in failing to give him a credit of the 25 per cent reduction in tax provided by Title XTT of the Revenue Act of 1924 on such part of his taxable net income for 1924 as is taxable at 1923 rates, and (2) in computing each petitioner’s earned income credit on the minimum amount of $5,000.
    FINDINGS OP PACT.
    The petitioners are members of the partnership of Rich, Schwartz & Joseph of Nashville, Tenn. The firm is a dealer in ladies’ ready-to-wear. It has been in existence for many years. During the year 1924 the partnership was composed of three members, the two petitioners and Arthur J. Joseph.
    For many years the partnership books have been kept upon a fiscal year basis ending June 30. The partners have made individual income-tax returns upon the basis of the calendar year. The share of the profits of the partnership for the fiscal year ended June 30, 1924, credited to each of the petitioners was $4,404.04. All of this income was reported in each petitioner’s individual income-tax return for the calendar year 1924, but each showed that one-half of his share of the partnership profits, or $2,202.02, was taxable at rates for the calendar year 1923, and that the other one-half, or $2,202.02, was taxable at rates for the calendar year 1924. Each petitioner showed on his return the total tax on the $2,202.02 falling within the calendar year 1923 at the original 1923 rates and claimed a deduction from the total tax of 25 per cent of the amount thereof under the provisions of Title XII of the Revenue Act of 1924. The amount of the credit thus claimed in the case of Leo Schwartz was $62.28 and in the case of Julius Rich $55.07. The respondent has disallowed these credits in the computation of deficiencies.
    In the computation of the net income of the partnership for the purpose of determining the distributable shares of net income the partnership first deducted from gross income salaries payable to the partners in the aggregate amount of $24,000. For many years it had been the practice of the partnership to deduct from gross income salaries for the partners in the determination of the net income. Prior to July 1, 1920, the salary paid to each partner was $5,000. This salary allowance was based upon an oral agreement between the partners. On July 3, 1920, the partners entered into a written agreement which was to continue for a period of 5y2 years from July 1, 1920, which declared in part:

      (2) Said partnership shall commence as of the date of July 1st, 1920, and shall continue for the term of five and one-half (5%) years from date, thereby ending December 31st, 1925.
    (3) As of July 1st, 1920, each of the three partners had a one-third interest in the stock in trade, money, assets, credits, and things belonging to and owing to said firm, and of all such matters as are generally included in annual accounts.
    (4) Each of the three partners shall be paid a salary of Eight Thousand ($8000.00) dollars per annum, which shall be charged to the expense of carrying on and conducting the business; and before a division of profits; the net profits of the business shall accrue to each of the three partners in equal parts.
    4c * s|e J{: * *
    (8) As a material consideration for the execution of this contract said Julius Rich and Arthur J. Joseph hereby agree that during' each year for the full term of this contract they will have charged to their respective stock accounts, on the books of the firm, the aggregate sum of Thirty Five Hundred ($3500.00) Dollars, as follows: Twelve Hundred and Fifty ($1250.00) Dollars of said amount to be charged to the stock account of Julius Rich, and Twenty-two Hundred and Fifty ($2250.00) Dollars to be charged to the stock account of Arthur J. Joseph; and the aggregate amount of both items, is to be credited to the stock account of said Leo Schwartz, on the books of the firm. The first amounts so charged and credited shall be as of July 1st, 1921, and like amount for each succeeding year during the life of this contract.
    (9) Should either of the partners suffer from sickness at any time, which should incapacitate him from attending to the duties incumbent on him in said partnership, and should such sickness or disability prevent him from being at the store, then and in such case, and in consideration of the good fellowship and friendly feeling existing, it is mutually agreed that the full interest in the business of such invalided or sick partner, shall remain and be in full force and effect, regardless of the duration of such inability to attend to business, and the consequent absence from the store, during the full term of this partnership agreement.
    The earnings of the partnership for the fiscal year ended June 80, 1924, before the deduction of salaries for partners, was $37,212.12. Schwartz received $15,904.04; Rich, $11,154.04; and Joseph, $10,154.04. In their individual income-tax returns for 1924 Leo Schwartz claimed as earned income $10,000 and Julius Rich either $8,000 or $G,750. The respondent determined deficiencies in each case upon the basis .of an earned income of only $5,000.
   OPINION.

Smith:

The decision on the first question involved in these proceedings is governed by the Board’s decisions in Charles Colip, 5 B. T. A. 123, and Walter A. DeCamp, 6 B. T. A. 897. In accordance therewith the question must be resolved adversely to the petitioners.

The second question relates to the “ earned income ” of each petitioner for the calendar year 1924. Each was a member of a partnership which provided in its partnership agreement for the payment of salaries to members. Under the agreement each of the three partners was to receive a salary of $8,000 per year. By reason of the fact that Leo Schwartz rendered more valuable services to the partnership than those rendered by the other partners, the partnership agreement provided, as indicated in the findings of fact, that certain credits should be made to the account of Schwartz and deducted from the stock accounts of Rich and Joseph for the purpose of adequately compensating him for services performed. So far as the record shows these credits were to be made to Schwartz even though the net result of the partnership operations was a loss in any year. Schwartz claims that his earned income for the year 1924 was $8,000 from the partnership and $3,500 additional from Rich and Joseph. Rich claims that his earned income for the year was $8,000.

Section 218(a) of the Revenue Act of 1924 provides in part:

Individuals carrying on business in partnership shall be liable for income tax only in their individual capacity.

Subsection (c) of the same section provides:

The net income of the partnership shall be computed in the same manner and on the same basis as provided in section 212 except that the deduction provided in paragraph (10) of subdivision (a) of section 214 shall not be allowed.

Section 209 of the Act provides in part as follows:

(a) For the purposes of this section—
(1) The term “earned income” means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income producing factors, a reasonable allowance as compensation for the personal services actually rendered by the taxpayer, not in excess of 20 per centum of his share of the net profits of such trade or business, shall be considered as earned income.
(2) The term “ earned income deductions ” means such deductions as are allowed by section 214 for the purpose of computing net income, and are properly allocable to or chargeable against earned income.
(3) The term “ earned net income ” means the excess of the amount of the earned income over the sum of the earned income deductions. If the taxpaj'er’s net income is not more than $5,000, his entire net income shall be considered to be earned net income, and if his net income is more than $5,000, his earned net income shall not be considered to bo less than $5,000. In no case shall the earned net income be considered to be more than $10,000.
*******
(c) In the case of the members of a partnership the proper part of each share of the net income which consists of earned income shall be determined under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary and shall be separately shown in the return of the partnership and shall be taxed to the member as provided in section 218.

The only regulations which the respondent has promulgated relating to this section are articles 1661 and 1662 of Regulations 65. The former provides—

* * * The earned income credit will be allowed to the members of a partnership with respect to the share of the net income belonging to each which consists of earned income. There must be included in the return of the partnership a statement showing (1) the amount of earned income as defined in article 1662, and (2) the names of the members and the amounts of their respective shares of earned income.

Article 1662 provides in part:

The term “ earned income ” means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, a reasonable allowance in compensation for personal services actually rendered by the taxpayer shall be considered as earned income, but the total amount which shall be treated as the earned income of the taxpayer from such trade or business shall, in no case, exceed 20 per cent of his share of the net profits of such trade or business.

Although subdivision (c) of section 209 of the taxing statute contemplates that the Commissioner shall make regulations for the purpose of determining the earned income of a partner, the application of the above quoted regulations to the case at bar is somewhat obscure. The fair inference to be drawn from them is that where partners are engaged in a trade or business in which both personal services and capital are material income-producing factors, the 20 per cent limitation on the share of the profits which may be considered earned income provided for by subsection (1) of paragraph (a) of section 209 of the taxing statute is applicable. That the Commissioner has so interpreted his regulations is clear from the fact that form 1065-A, upon which partnerships were required to make returns for 1924, provides that any amounts paid as salaries to partners shall be included in the distributable net income and that they shall not be deducted from gross income in arriving at the net income.

In Mimeograph 3283, C. B. IY-I, p. 14, Ruling No. IV-9-2045, it is stated:

(c) In tbe case of a partnership which is engaged in a trade or business in which both capital and labor are material income-producing factors, each partner who renders services may consider as reasonable compensation for such services an amount not in excess of 20 per cent of his share of the net profits of the partnership. A member of the partnership who does not render services to the partnership may not consider any part of his share of the profits as yarned income.
(e) Attention is called to the fact that in the forms for 1924, salaries paid to the individual members of a partnership are not to be deducted in computing the net profits of the partnership, and the members do not report the salaries received from the partnership in item 1, Form 1040, as salary, but include such salary in the profits from the partnership, which are reported in item 4, Form 1040. If the partnership is engaged in a business in which capital is not a material income-producing factor, it will not be necessary for column 4 of item 13, Form 1065, to be filled in, since the 20 per cent limitation does not apply. An individual who is engaged in a trade or business on his own account should not deduct in Schedule A, Form 1040, any compensation paid to himself. All of the profits from the business should be reported in item 2, Form 1040.

As above indicated the respondent has computed the deficiencies upon the basis that the last sentence of section 209(a)(1) of the taxing statute applies to each petitioner. This is objected to by the petitioners on the ground that it is the partnership which is engaged in a trade or business and not each petitioner and that a partnership is not a “ taxpayer ” within the meaning of the taxing statute. That a partnership is not a taxable entity is of course conceded. In United States v. Coulby, 251 Fed. 982, it was stated:

This law [Revenue Act of 1913], therefore, ignores for taxing purposes the existence of a partnership. The law is so framed as to deal with the gains and profits of a partnership as if they were the gains and profits of the individual partner. The paragraph above quoted so provides. The law looks through the fiction of a partnership and treats its profits and its earnings as those of the individual taxpayer. Unlike a corporation, a partnership has no legal existence aside from the members who compose it. The Congress, consequently, it would seem, ignored, for taxing purposes, a partnership’s existence, and placed the individual partner’s share in its gains and profits on the same footing as if his income had been received directly by him without the intervention of a partnership name.

On appeal the above statement was approved, but with the following reservation, 258 Fed. 27:

* * * We concur in and adopt the conclusion reached. However, the statement made in the opinion that a partnership has no legal existence, aside from the members who compose it, is too broad, as, for instance, in view of the Bankruptcy Act (Act July 1, 1898, c. 541, 30 Stat. 544 [Comp. St. §9585 et seq.]), yet as applied to the particular portion of the statute and the question in hand it is correct, and with this explanation we approve the reasoning of the opinion.

We think that the language of section 209(a) (1) is applicable to each of these petitioners.

Under the partnership agreement Leo Schwartz received in 1924, $8,500 more than his share of the partnership profits. This money was to compensate him in part for services performed to the partnership. It was charged to the stock accounts of the other two partners. It was payable without regard to profits or losses made or sustained by the partnership. We think that the amount was “ earned income ” of Schwartz.

In our opinion the respondent has correctly determined that the earned income of Rich for the year 1924 was the amount of $5,000.

Judgment will be entered on 16 days’ notice, under Bule 50.


text:
    Dorsey Drug Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19813.
    Promulgated June 8, 1927.
    A corporation which filed a return ior the fiscal year ended August 31, 1921, and voluntarily changed its accounting period to a calendar year basis and filed a return for the four months intervening, may not deduct a loss for such period from the income of the next succeeding calendar year.

      G. B. Allison, for the petitioner.

      Joseph K. Moyer, Esg., for the respondent.
    This appeal is from the determination of a deficiency in income tax for the year 1922 in the amount of $106.63. The Commissioner has refused to allow the deduction of a loss for a four-month period preceding the calendar year for which the petitioner made its return. The material facts are stipulated by the parties.
    findings of fact.
    The petitioner is a corporation with its principal office at Dallas, Tex. It was organized May 15,1920, but transacted no business until September 1, 1920. It filed an income-tax return for the twelvemonth period September 1, 1920, to August 31, 1921. By permission of the Commissioner the petitioner later changed its accounting period to a calendar year basis and, in order to effect such change, filed a return for the period September 1 to December 31, 1921. For such period the petitioner reported a loss in the amount of $4,965.10. For the calendar year 1922 the net income of the petitioner amounted to $1,653.02.
    In computing its tax liability for the year 1922 the petitioner deducted from net income for that year the loss reported for the period September 1 to December 31, 1921. The Commissioner disallowed the deduction.
   OPINION.

Smith:

The only question to be decided is whether the petitioner is entitled, under section 204(b) of the Revenue Act of 1921, to deduct a loss for a preceding four-month period in computing taxable income for the calendar year 1922 when the petitioner was in existence for the whole preceding fiscal year and filed the return for a fractional part thereof in effecting a change of accounting period voluntarily undertaken. Section 204(b) provides as follows:

If for any taxable year beginning after December 31, 1920, it appears upon tbe production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net Income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess shall be allowed .as a deduction in computing the net income for the next succeeding taxable year; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.

Section 200(1) of the same Act states that:

The term “ taxable year ” means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or section 232. The term “ fiscal year ” means an accounting period of twelve months ending on the last day of any month other than December. The first taxable year, to be called the taxable year 1921, shall be the calendar year 1921 or any fiscal year ending during the calendar year 1921.

We have held in Tacoma Grocery Co., 1 B. T. A. 1062, that a period occurring between two fiscal years, caused by a change in the accounting period, did not constitute a taxable year within the meaning of section 226 of the 1918 Act, and that the taxpayer could not, under section 204(b) of the Act, deduct a loss for the preceding fiscal year from the income for the succeeding eleven-month period. There, the petitioner had voluntarily changed its accounting period with the permission of the Commissioner. We said in that opinion:

In such a case as this, where the taxpayer has been in existence prior to the beginning of the taxable period, and the return does not purport to include income received during the twelve months preceding the close of the taxable period, the definition of a taxable year is so clear as to leave no room for construction. We must conclude that the taxpayer is not entitled to the benefits of section 204 (b).

We held in Arthur Walker & Co., Inc., 4 B. T. A. 151, that where a taxpayer voluntarily changed its accounting period from the.fiscal year ending March 31 and filed a return for the period April 1, 1921, to February 28,1922, no deduction could be claimed thereon for a loss sustained over the preceding fiscal year ended March 31, 1921, under section 204 (b) of the Revenue Act of 1921. We said in that opinion:

The net loss provision of the 1921 Act is confined in its operation to offsetting a net loss of one year against the income of the succeeding year, and no provision is made for offsetting the loss of one year against the income of only a portion of the succeeding year.

See also Leland Stave Co., 6 B. T. A. 882.

In Carroll Chain Co., 1 B. T. A. 38, which the petitioner has cited, it was held that, where a corporation was organized in November, 1921, and adopted a fiscal year ending on June 30, the period ended June 30, 1922, was its first fiscal year. In that case the corporation was not in existence for the full fiscal year and the return included all income received by it for the twelve-month period prior to the close of its fiscal year. It is obvious that a distinction must be made between the case where a taxpayer is not in existence for the full fiscal or calendar year and a case where, by a voluntary change of accounting period, the return is made for only a fractional part of the full year of its existence. It is not shown whether the petitioner herein sustained a net loss or had a net gain over the entire twelve-month period of the year ended December 31, 1921. The petitioner can not deduct a loss for a fractional part of a year occasioned by a voluntary change of accounting period in computing taxable income for the next succeeding year.

Judgment will be entered for the respondent.