author: Milliken:

text:
    T. Monroe Dobbins, Executor, Estate of Emily M. Dobbins, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11012.
    Promulgated September 16, 1927.
    A person js taxable on income of a trust which she received as legatee of an original beneficiary of the trust.

      Robert McCracken, Esq., for the petitioner.

      A. n. Fast, Esq., for the respondent.
    This proceeding involves a deficiency in income tax for the year 1918, in the amount of $14,175.55. Petitioner contends that respondent erred in including in the gross income of his testatrix, for the year 1918, the income which arose from a trust and of which such testatrix was the beneficiary under the will of an original beneficiary of the trust. The facts are stipulated.
    FINDINGS OF FACT.
    T. Monroe Dobbins is the executor of the estate of Emily H. Dobbins, deceased.
    Edward T. Dobbins died in 1906. By his will, he created a trust, the net income of which was payable to the extent of $2,000 a month to testator’s sister, Mary A. Dobbins, and all the net income in excess of that amount was payable in equal shares to Mary A. Dobbins and testator’s brother, Murrell Dobbins. The trust was to continue during the life of Mary A. Dobbins, who is still living. The trustees were directed to pay on the death of Mary, the corpus of the trust to such charitable institutions as Mary A. Dobbins should, by her will, appoint. It is uncertain to whom the corpus will go at the death of Mary, in default of an appointment by her. Murrell Dobbins died testate in 1917, and by his will made his wife, Emily M. Dobbins, petitioner’s testatrix, his residuary legatee.
    Following the death of Murrell Dobbins, a contest arose over the question who was entitled to the income of the trust. This was determined by an adjudication of the Orphans Court of Philadelphia County, Pennsylvania (Dobbins’ Estate, 26 Pa. Dist. Rep. 1107), where it was held that the executor of Murrell Dobbins was entitled to the half interest of his testator in the surplus net income of the trust, so long as Mary A. Dobbins was alive.
    Emily M. Dobbins received under the will of her husband the share of income to which he was entitled and, upon advice of counsel, did not include in her income-tax return for 1918 any part of such income. Respondent has determined that so much of the income of said trust as was received by Mary A. Dobbins, during the year 1918, was part of her gross income for that year.
    Upon the death of Murrell Dobbins, return was made for Federal estate-tax purposes, but this return omitted to state that his estate enjoyed certain rights under the will of Edward T. Dobbins. Respondent, upon investigation, included in the gross estate of Murrell Dobbins the right of his estate to receive the income from the trust created by Edward T. Dobbins, and valued the same for estate-tax purposes at $212,438.05. The estate of Murrell Dobbins paid additional tax by reason of the inclusion of said amount in the gross estate of said testator.
    Emily M. Dobbins died in the latter part of 1922, without having received an amount equal to the total sum of $212,438.05, the amount at which the right of the estate of her husband to receive such income was valued for estate-tax purposes.
   OPINION.

Milliken:

Petitioner makes three contentions: first, that Emily M. Dobbins was a legatee under the will of her husband, and that the income which she received, which arose from the trust created by Edward T. Dobbins, was in the nature of a bequest, and therefore, not taxable; second, that Emily M. Dobbins might have elected to renounce the will of her husband and therefore she surrendered a valuable right and became a purchaser for the value of the income; and, third, that the right to receive such income having been taxed to the estate of Murrell Dobbins, should not be again taxed to her.

It is not clear, from the facts stipulated, whether Emily M. Dobbins received the income of the trust directly from the trustees under the will of Edward T. Dobbins, or whether the income was first paid to the executor of Murrell Dobbins and by him turned over to her. However, the view we take of this question renders this matter immaterial.

The income of which Emily M. Dobbins was in receipt was the income of the trust created by Edward T. Dobbins. Under the rule laid down in Irwin v. Gmit, 268 U. S. 161; 5 Am. Fed. Tax Rep. 5380, Murrell Dobbins was, while he was alive, taxable on this income. Under section 219 of the Revenue Act of 1918, this income was deductible by the trustees of the will of Edward T. Dobbins, and returnable by and taxable to Murrell Dobbins. The will of Murrell Dobbins simply transferred his right to this income to Emily, his widow. At all times, it remained, for income-tax purposes, income from a trust. It Avas thereupon Emily’s duty to make return of what she received, and she was taxable thereon. The intervention of a second beneficiary does not serve to take this proceeding out of the rule laid down in the Gavit case. See also Appeal of Ernest P. Waud, et al., Executors, 6 B. T. A. 871.

In support of his second contention, petitioner cites Warner v. Walsh, 15 Fed. (2d) 367; 6 Am. Fed. Tax Rep. 6340. In our opinion, this decision is not applicable. In the Warner case, the subject matter was an annuity and the court based their decision on the provisions of section 4 of the Revenue Act of 1916 and section 213(b) (2) of the Revenue Act of 1918. These sections bore on that case in that they contained provisions relative to the taxation of annuities. In the instant case, we have a bequest not of an annuity, but of income. The distinction betAveen bequests of income and bequests of annuities is of long standing. Cf. Ronald DeReuter v. Commissioner, 7 B. T. A. 600. The taxation of annuities is covered by section 213 of the Revenue Act of 1918, and the taxation of income derived from trusts and estates is governed by section 219 of the same Act. This proceeding falls within the- rule laid down in the Gavit case.

The facts stipulated are not sufficient to enable us to determine the deficiency, even if we held that the Warner case was applicable. We do not know the value of the estate of Murrell Dobbins, what part of that estate Avent to his widow, or what Avas the amount of the income from the trust which she received.

The third contention of petitioner must be disposed of adversely to him on the authority of Appeal of Ernest P. Waud, et al., Execu tors, 6 B. T. A. 871, and Ernest M. Bull, Executor, v. Commissioner, 7 B. T. A. 993.

Reviewed by the Board.

Judgment will he entered for the respondent.

Arundell and Moréis did not participate.


source: Caselaw Access Project

author: Arundell:

license: Public Domain

text:
    Frederick C. Renziehausen, Petitioner, v. Commissioner of Internal Revenue, Respondent. Henry Schuetz, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 10658, 7458.
    Promulgated September 17, 1927.
    1. Deduction for obsolescence of intangibles denied upon authority of Red Wing Malting Go. v. Willeuts, 15 Fed. (2d) 626, and Appeal of Manhattan Breicing Go., 6 B. T. A. 952.
    2. Petitioner discontinued tbe manufacture-of intoxicating liquors in 1917 under the restrictions of war-time prohibition. In 1919 it resumed distilling operations for the manufacture of medicinal whiskey and continued to distill whiskey for medicinal purposes until forced to discontinue on November 23, 1921, by the enactment of the Willis-Campbell Act. In 1922, the last year on appeal, petitioner was still disposing of its stock in trade, under the same trade-marks, trade-name, and trade-brands as it used prior to prohibition, but under different methods and to a different clientele. Held, that petitioner’s intangibles were not destroyed on January 16, 1919, when ratification of the Eighteenth Amendment was completed; and that it suffered no deductible loss in any of the years on appeal, by virtue of destruction of intangibles by prohibition legislation.
    3. Upon the evidence, held that petitioner is not entitled to deductions for 1918, 1919, and 1920 for obsolescence of tangible properties.
    4. Petitioner’s entire distilling plant, other than its bonded warehouses, was rendered obsolete by the passage of the Willis-Campbell Act on November 23, 1921, and the continued refusal of the Commissioner of Internal Revenue to issue permits for the manufacture of medicinal whiskey under the provisions of that Act; and petitioner is entitled to a deduction for 1921 for obsoleteness of its plant facilities, the amount of which is herein determined.
    5. Upon the evidence, held that certain whiskey sold by petitioner in 1922 was property of a kind which would properly have been included in his inventory, had it been on hand at the close of that year, and that the profit from the sale of such whiskey is taxable as ordinary income under section 201 of the Revenue Act of 1921, and not as a capital gain under section 206.

      W. A. Seifert, Esq., for the petitioners.

      John D. Foley, Esq., for the respondent.

      These proceedings were consolidated for hearing and decision. In the case of Frederick C. Renziehausen, respondent has determined deficiencies of $186,327.12 for 1918, $31,343.78 for 1919, $189,887.32 for 1920, $83,028.63 for 1921, and $69,752.49 for 1922. In the case of Henry Schuetz, Jr., respondent has determined deficiencies of $13,652.11 for 1918, $277.20 for 1920, and $637.98 for 1921, and an overassessment of $670.67 for 1919.
    In the case of Frederick 0. Renziehausen the issues are: (1) Respondent’s refusal to allow deductions from income of the years 1918, 1919, and 1920 for obsolescence of good will, trade-marks, trade-names, and trade-brands of the Large Distilling Co., having an alleged value of $1,000,000 at March 1,1913; (2) respondent’s refusal to allow a loss deduction for 1919 for obsoleteness of the good will, trade-marks, trade-names, and trade-brands of the Large Distilling Co.; (3) respondent’s refusal to allow deductions from income of 1918, 1919, 1920, and 1921, for obsolescence of the tangible properties of the Large Distilling Co., having a book value and alleged depreciated value of $276,652.79 at January 1, 1918; (4) respondent’s refusal to allow a loss deduction for 1921 for obsoleteness of the tangible properties of the Large Distilling Co.; (5) respondent’s refusal to allow deductions from income of the years 1918, 1919, 1920, and 1921, for obsolescence of the tangible and intangible properties of the Large Distilling Co.; (6) respondent’s refusal to allow deductions for obsolescence of good will in computing the income of the partnership of Schuetz, Renziehausen & Co. for the years 1918, 1919, and 1920; (7) failure of respondent to allow any deductions for depreciation of the physical assets of the Large Distilling Co., in computing income for 1918, 1919, 1920, and 1921; (8) respondent erred in including in income of 1920 an alleged profit of $31,015.50 from the sale of certain whiskey; and (9) respondent’s refusal to tax as a capital gain, under section 206 of the Revenue Act of 1921, the profit from the sale of certain whiskey, in 1922.
    In the case of Henry Schuetz, Jr., there are but two issues: (1) respondent’s refusal to allow deductions for obsolescence of good will in computing the income of the partnership of Schuetz, Ren-ziehausen & Co. for 1918,1919, and 1920; and (2) respondent erred in determining that petitioner realized a profit of $260.25 from the sale of certain real property in 1920.
    FINDINGS OF FACT.
    Frederick C. Renziehausen is a resident of Pittsburgh, Pa., and sole owner of the whiskey-distilling business conducted under the trade name of tlie Large Distilling Co. He was also the owner of a one-half interest in the partnership of Schuetz, Renziehausen & Co., wholesale liquor dealers, in Pittsburgh.
    Henry Schuetz, Jr., is a resident of Pittsburgh, Pa., and, during the years on appeal, owned a one-half interest in the partnership of Schuetz, Renziehausen & Co.
    In 1196 Jonathan Large founded a whiskey-distilling business, under the trade name of the Large Distilling Co., at Mount Washington (now a part of Pittsburgh), Pa. Three years later the distillery was moved to Jefferson Township, Allegheny County, Pennsylvania, where the business has been carried on since that time. From 1884 to 1891 the business was conducted as a partnership, composed of Henry Large and his wife, and the petitioner, Renziehausen. In 1897 Renziehausen became sole owner of the business, and thereafter to the present time conducted it as a sole proprietorship.
    The business of the Large Distilling Co. was principally that of distilling whiskey which it sold to wholesale liquor dealers under uniform contracts. It also carried on a warehousing business, storing the whiskey which it distilled in its bonded warehouses until matured and withdrawn by the owners, for which the latter paid the monthly storage charges stipulated in the sales contracts. It also bottled and cased the matured whiskey in bond, for which it received compensation from the owners thereof. From time to time, with varied frequence, it purchased warehouse receipts for whiskey in its own bonded warehouses and resold the same at a profit. It carried the whiskey left over from each distilling season to various stages of maturity, and, as opportunities were afforded, disposed of it to the trade.
    During September and October of each year a close watch was kept on growing grain crops and the trend of the Chicago and Milwaukee grain markets, to observe the prevailing prices for grain. Based upon these observations, the price for the whiskey to be distilled in the following winter and spring was fixed, and contracts were then solicited from the wholesale trade based upon that price. The contracts were printed and uniform, and for the distilling season of 1916-1917 read, in terms and figures, as follows:
    Established 1796 The Large Distilling Company P. 0. Box 1060, Pittsburgh, Pa.
    Distillers of Large Bye Whiskey
    Large, Penn’a ——— 191—
    To---
    We propose to distill for your account (-) - barrels Large Rye Whiskey, to be delivered in our U. S. Bonded Warehouse, on our distillery premises, located at Large, on Peters Creek, Allegheny County, Pennsylvania, (contingent upon strikes and unavoidable accidents) as follows:
    — Bbls. in November, 1916 — Bbls. in January, 1917 — Bbls. in April, 1917. — Bbls. “ December, 1916 — Bbls. “ February, 1917 — Bbls. in May, 1917. — Bbls. “ March, 1917 — Bbls. “ June, 1917.

      At 65 ceñís per proof gallon, Net Gash, original gauge, in bond. Rate of storage, five (5) cents per bbl. per month.
    Respectfully submitted.
    The Large Distilling Company Per -.
    Accepted-191—
    The whiskey required to fill the contracts was distilled in the following fall and spring; placed in Government bonded warehouses, and the warehouse certificates therefor turned over to the owners of the whiskey according to the quantities purchased. After the whiskey had remained in the warehouses for the time required by Government regulations, usually four years, it was bottled in bond, under Government supervision, by the Large Distilling Co. for the owners of the whiskey.
    “ Large ” whiskey, by which name the product of the Large Distilling Company was generally knoivn, was distributed by wholesale and retail liquor dealers throughout the whole of the United States. It was generally regarded by the wholesale trade as one of the leading rye whiskeys of the country. For a long period prior to 1913 and thereafter until the Large Distilling Co. ceased distilling for beverage purposes in 1917, there was a steady growth in the demand for “ Large ” whiskey. The company seldom operated its distillery to full capacity. It was the practice to determine upon the quantity of whiskey to be distilled in the following season before soliciting contracts from the wholesale trade, and contracts were accepted with due regard to the total quantity to be distilled. Usually the quantity specified in the contract of a particular wholesale dealer was based upon the quantity upon which that dealer was making tax payments. The purpose of this was to prevent, as far as practicable, speculation in warehouse receipts for “ Large ” whiskey. Because of these business practices, the demand for “Large” whiskey, as a general rule, exceeded the supply.
    From 1899 to 1913, inclusive, the Large Distilling Co. expended for advertising the total sum of $82,500.02; and from 1914 to 1921, inclusive, it expended for the same purpose the total sum of $86,155.61. The advertising consisted of installing exhibits at local and international expositions, well designed show cards, and displays in leading trade journals, newspapers, theatre programs, whiskey blotters, and the distribution of price lists. It exhibited its product at ten international expositions, viz: Chicago, 1893; Paris, 1900; St. Louis, 1904; Liege, 1905; Milan, 1906; Jamestown, 1907; Brussels, 1910; Ghent, 1913; London, 1914; and San Francisco, 1915; at nine of which it was awarded the grand prizes.
    In addition to the amounts expended specifically for advertising, the Large Distilling Co., between 1899 and 1913, inclusive, paid to its customers the total sum of $55,781.10 for leakage; and from 1914 to 1921, inclusive, it expended for the same purpose the following amounts:

    Leakage refers to the evaporation while the whiskey is stored in the Government bonded warehouses in excess of the Government allowance, and upon which the owners of the whiskey were required to pay the tax. The tax on excess evaporation was paid by the owners and they were reimbursed by the Large Distilling Co., although there was no specific provision in the contracts under which the company could be held liable.
    On July 19, 1897, the Large Distilling Co. purchased a trade-mark for $5,000 cash.
    At March 1, 1913, the Large Distilling Co. owned trade-marks, trade-names and trade-brands as follows: Five-pointed star within a star; the label “ Large Whiskey ”; the slogan “ Drink a Little Large”; and the company also had registered the label “Large, Established 1796, Monongahela Pure Eye Whiskey”; and “Pure Monongaliela Eye Whiskey Made by Henry Large, Jr., Pittsburgh, Pennsylvania ” within a circle.
    For the years 1908 to 1912, inclusive, the books of account of the Large Distilling Co. show tangible property employed in the business and earnings, as follows:

      From the time he became a partner in the Large Distilling Go. in 1884 to and including 1912 the petitioner Eenziehausen was not paid any salary for his personal services. A reasonable compensation for the period 1908 to 1912, inclusive, for the services he rendered to the business would have been $15,000 per annum.
    In December, 1907, shortly after distilling operations for the season of 1907-1908 had commenced, the Large Distilling Co.’s distillery was destroyed by fire. The distillery was rebuilt shortly thereafter, but no more whiskey was distilled until the following distilling season. Had not the fire occurred the company, during the succeeding four or five years, would have received income from the storing and bottling of the whiskey which would have been distilled in the season of 1907-1908.
    During the past 22 years the petitioner Eenziehausen has carried on the business of the Large Distilling Co., entirely with his own funds; no borrowed money has been employed in the business during that time.
    The business of the Large Distilling Co., or any interest or any share therein, has never been offered for sale during the time ownership has vested in the petitioner Eenziehausen.
    The last whiskey produced by the Large Distilling Co. for beverage purposes, was distilled in May, 1917. Thereafter and until January 16, 1920, the effective date of the Eighteenth Amendment, no whiskey could be produced for beverage purposes because of war-time prohibition. With the imposition of war-time prohibition and the progress which had been made toward adoption of the Eighteenth Amendment, Eenziehausen became convinced in 1918 that the distilling part of the business of the Large Distilling Co. was through for all time, and that the business as a whole would be entirely wound up and liquidated within four years. During 1919 Eenzie-hausen became aware that he could lawfully manufacture whiskey for medicinal purposes; and in the fall of that year the Large Distilling Co. resumed distilling operations for the production of whiskey for medicinal purposes and continued such operations until at or about November 23, 1921, when, because of the enactment of the so-called Willis-Campbell Act which provided that whiskey could be manufactured for medicinal purposes only under permits issued by the Commissioner of Internal Eevenue, and petitioner having failed to secure such a permit, distilling operations ceased. No whiskey has been manufactured by the Large Distilling Co. since November 23, 1921. No permits for the production of medicinal whiskey have been issued, under the provisions of the Willis-Campbell Act, by the Commissioner of Internal Eevenue.

      The Large Distilling Co. manufactured whiskey for medicinal purposes in 1919, 1920, and 1921 in the following quantities:
    Barrels.
    1919_ 396
    1920_ 5, 858
    1921_10,400
    Total_16, 654
    The cost of the physical properties of the Large Distilling Co., exclusive of land, at January 1, 1918, the accrued depreciation at the same date, and the depreciation sustained in 1918, 1919, 1920, and 1921, are as follows:

    Of the physical properties above listed, none, other than the bonded warehouses, have been put to any use since cessation of distilling operations on or about November 23, 1921. None of them are adaptable to any other purpose than the processes of manufacturing whiskey. The salvage value of the physical properties, not including that of the bonded warehouses, is $19,375.
    The four bonded warehouses are of the rack type of construction for the storage of whiskey in barrels, and they are not adaptable to any other purpose. Their total capacity is 55,000 barrels. Their salvage value, because of the type of construction, location, and cost of demolition, is nil. All four of the warehouses were being used for the storage of whiskey during the years on appeal and as late as 1923, and the extent to which they were being used is indicated by the following:

      Prior to January 1, 1918, the Large Distilling Co. disposed of the whiskey it manufactured, in bulk, exclusively to the wholesale liquor trade. Such sales of whiskey manufactured after that date as have been made have been to persons holding Government permits to purchase whiskey for medicinal purposes, and have consisted entirely of bottled-in-bond whiskey.
    The business of the Large Distilling Co. has been in process of liquidation since the fall of 1921.
    In his deficiency determination respondent refused to allow a deduction for any of the years on appeal for obsolescence or for obso-leteness of the tangible or intangible properties of the Large Distilling Co.
    The firm of Schuetz, Renziehausen & Co. was founded in 1819 by the petitioners Renziehausen and Schuetz and Frederick Guedemann. Guedemann died in 1892 and the business was carried on thereafter, until liquidated in 1925, by the petitioners, Renziehausen and Schuetz, as equal partners. The business of the partnership was that of wholesale liquor dealers, selling brandies, cordials, fine liquors, and wines. At March 1, 1913, and thereafter until January 16, 1920, the effective date of the Eighteenth Amendment, the firm enjoyed the patronage of the most substantial retailers in the territory in which it did business.
    At March 1, 1913, Schuetz, Renziehausen & Co. owned registered trade-marks for “ Fort Pitt Whiskey,” “ Diamond Monogram Whiskey,” and “ Crusader Dry Gin.” For the years 1908 to 1912, inclusive, the books of account show tangible property employed in the business and earnings, as follows:

    Liquidation of the business of Schuetz, Renziehausen & Co. was begun in 1920 and completed in 1925. When prohibition legislation became effective its stock of merchandise consisted of brandies, cordials, gins, other fine liquors, and wines. The wholesale and retail drug trade would not buy this class of merchandise. A permit was obtained from the Commissioner of Internal Revenue to donate the stock to hospitals in accordance with their authorized quota, but this method of liquidation took too long and in 1925 all of the remaining stock was dumped in the sewers of the building, under Government supervision.
    In his deficiency determinations in the cases of both petitioners, respondent refused to allow deductions from the income of the partnership of Schuetz, Renziehausen & Co. for the years 1918, 1919, and 1920 for obsolescence of intangibles.
    In his deficiency determination in the case of the petitioner Ren-ziehausen, respondent failed to allow any deduction for any of the years on appeal for depreciation of the physical properties of the Large Distilling Co. Reasonable allowances for such depreciation, exclusive of any allowance for obsolescence, are as follows:
    1918_$16, 224.15 1920_$16,173. 70
    1919_ 16,173. 70 1921_ 15, 008. 26
    The net income shown in the deficiency notice for 1920 is overstated by $31,015.50 by virtue of respondent erroneously including an alleged profit of that amount upon an alleged sale of whiskey in that year; and the net income shown in the deficiency notice for 1921 and 1922 is understated by $1,637.14 and $5,248.44, respectively, by virtue of respondent’s failure to include certain profits earned in these years.
    In 1908 there was opened on the books of the Large Distilling Co. an account captioned “ Old Whiskey.” At the close of each distilling season the whiskey manufactured and not sold was charged to this account and carried to maturity when it was sold to the trade through the organization of the Large Distilling Co. In 1922 all of the whiskey then carried in this account was sold and at the date of the sale it had been held for profit for more than two years. Renziehausen regarded the whiskey carried in this account as a personal investment. Over a long period of time the petitioner Renziehausen had carried personal investments on the books of the Large Distilling Co. Respondent in the deficiency determination refused to tax the profit • from the sale of this whiskey as a capital gain at the rate of 12% per cent under the provisions of section 206 of the Revenue Act of 1921.
   OPINION.

Arundell:

In the case of Henry Schuetz, Jr., respondent determined an overassessment for 1919; hence, the Board is without jurisdiction of the issue raised for that year. Appeal of R. P. Hazzard Co., 4 B. T. A. 150; and Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The first issue in Renziehausen’s appeal is that respondent erred in refusing to allow deductions from the income of 1918, 1919, and 1920 for obsolescence of intangibles of the Large Distilling Co., of which he was sole proprietor, resulting from prohibition legislation based upon an alleged March. 1, 1913, value for such intangibles of $1,000,000. The issue has already been decided adversely to the petitioner by the Circuit Court of Appeals, Eighth Circuit, in Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626, and by this Board in Appeal of Manhattan Brewing Co., 6 B. T. A. 952; and on this issue we must find for respondent.

The second issue, which is alternative to the first, is that respondent erred in refusing to allow a deduction for 1919 for obsoleteness of the intangibles of the Large Distilling Co., resulting from prohibition legislation, based upon an alleged cost of $578,281.12. Petitioner contends that if the Board holds against him on the first issue then it must find that the intangibles of the Large Distilling Co. were wholly destroyed on January 16,1919, when ratification of the Eighteenth Amendment was completed by the required number of States, and that he is entitled to a loss deduction for that year measured by the cost of the intangibles, which cost he computes as follows:

For services rendered by petitioner without compensation 1884 to 1913 (29 years at $15,000 per annum)_$435,000.00
Advertising, 1899 to 1913_ 82, 500. 02
Leakage, 1899 to 1913_ 55,781.10
Trade-mark acquired for cash, July 19, 1897_ 5, 000.00
Total cost of intangibles_ 578,281.12

The facts preclude such finding. The mere ratification of the Eighteenth Amendment did not destroy the business of the Large Distilling Co. or render its intangibles obsolete, for it continued to carry on the business after January 16,1919, and after the Eighteenth Amendment and enforcement legislation became effective in 1920, under' the same trade-marks, trade-name, and trade-brand, although modified somewhat as to methods by reason of such legislation. Prior to 1919 the Large Distilling Co. sold its product before it was manufactured to the wholesale liquor trade and made delivery in bulk in an unmatured state at its bonded warehouses. Beginning with 1919 its whiskey was matured in bonded warehouses, bottled in bond, and disposed of to the wholesale and retail drug trade or others holding Government permits. As late as 1922, the last year we have for review,-the Large Distilling Co. was still disposing of its whiskey stock under the same trade-marks, trade-name, and trade-brands, and there is no record evidence as to when, if at all, the business was finally terminated. Prohibition wrought changes in the method of doing business and in the character of its clientele, but the business which it carried on both before and after prohibition became effective, and throughout all of the years under review, was essentially the same. We see no proper grounds upon which to base a deduction for 1919 or any other year on appeal for obsoleteness of intangibles of the Large Distilling Co.

The third issue in Renziehausen’s appeal is that respondent erred in refusing to allow deductions from the income of 1918, 1919, 1920, and 1921 for obsolescence of the tangible property of the Large Distilling Co. Petitioner contends that with the imposition of war-time prohibition and the progress made in 1918 toward final adoption of the Eighteenth .Amendment it became apparent in that year that the business of the Large Distilling Co. would have to be wound up within four years, and that the depreciated value of the tangible assets at January 1, 1918, less salvage value, should be obsolesced over the period February 1, 1918, to November 30, 1921. The petitioner Renziehausen testified at the hearing that because of the progress of national prohibition in 1918 he became convinced in that year that “ the jig was up ”; that the distilling part of the business was through for all time and the business as a whole would have to be wound up in about four years; and that he did not discover until some time in 1919 that the Large Distilling Co. could continue distilling whiskey for medicinal purposes. The Large Distilling Co. resumed distilling operations in 1919 and continued such operations until forced to discontinue in November, 1921, by virtue of the enactment of the Willis-Campbell Act and failure to secure a permit to continue distilling operations as provided in that Act.

Obsolescence, we have held, is the state or process of becoming obsolete, and the state of obsoleteness is reached when the property which can not be used for any other purpose is no longer useful for the purpose for which it was acquired. Appeal of Columbia Malting Co., 1 B. T. A. 999; Appeal of Manhattan Brewing Co., 6 B. T. A. 952. The right to an obsolescence deduction must be based upon substantial reasons for believing that assets would become obsolete prior to the end of their ordinary useful life; and it must have been known, or believed to have been known, to a reasonable degree of certainty, under all the facts and circumstances, when that event would likely occur. Appeal of Colmribia Malting Co., supra; Appeal of Cleveland Home Brewing Co., 1 B. T. A. 87. Under the circumstances of this case it can not be held that the tangible assets of the Large Distilling Co. were in a state or condition of becoming obsolete in 1918,1919, or 1920. Renziehausen thought he was through in 1918, but his convictions were based upon a lack of knowledge of his lawful rights; and in 1919 he resumed distilling operations and continued to carry on such operations until the enactment of the Willis-Campbell Act on or about November 23, 1921. The plant facilities of the Large Distilling Co. were being used at the close of 1919 and 1920 for the purposes for which they had been acquired, and apparently without any diminution as to usage prior to prohibition legislation. It was the passage of the Willis-Campbell Act in 1921 which prohibited the manufacture of medicinal whiskey except under permits issued by the Commissioner of Internal Revenue, and the continued refusal of that officer to issue such permits, which forced the petitioner to discontinue distilling operations and rendered the plant facilities of the Large Distilling Co., other than its bonded warehouses, obsolete; and this event could not have been foreseen in 1918, 1919, or 1920. As Renziehausen testified, the passage of the Willis-Campbell Act came suddenly, like a bolt out of a clear sky, and he did not at the time consider the passage of that Act possible. We find no error in respondent’s refusal to allow deductions from the income of 1918, 1919, and 1920, for obsolescence of the tangible properties of the Large Distilling Co. As to 1921, we think obsoleteness of the tangible properties, other than the bonded warehouses, took place wholly within that year, by virtue of the enactment of the Willis-Campbell Act and the continued refusal of the Commissioner of Internal Revenue to issue permits, under that Act, for the manufacture of medicinal whiskey. As to the amount of the deduction for that year, we leave that for determination under the next issue.

The fourth issue in Renziehausen’s appeal, which is alternative to the third, is that the respondent erred in refusing to allow a deduction for 1921 for obsoleteness of the tangible properties of the Large Distilling Co. We think that the tangible properties of the Large Distilling Co., other than its bonded warehouses, were rendered entirely obsolete in 1921 by virtue of the enactment of the Willis-Campbell Act, which prohibited the manufacture of medicinal whiskey except under permits issued by the Commissioner of Internal Revenue, and the continued refusal of that officer to issue such permits. We have set out in the- findings of fact the cost of these properties, the depreciation sustained thereon, and the salvage value thereof, and upon the basis of those facts we find that the petitioner is entitled to a loss deduction, for 1921, for obsoleteness of the tangible properties of the Large Distilling Co., exclusive of the loss on bonded warehouses, of $147,582.06.

As to the four bonded warehouses, we are of the opinion that petitioner suffered no deductible loss in 1921 in respect thereof. Unlike the other plant facilities which had become obsolete and were abandoned, the warehouses were continued in use for the purpose for which they had been constructed. It is true that these facilities were being used at only 50 per cent of their maximum capacity, and existing conditions at the close of 1921 indicated no greater usage in the future; but the very fact that the facilities were in use is sufficient proof that they had not reached the end of their useful life. Obso-leteness connotes lack of usefulness and absence of value; and where facilities are being used, whether at maximum or a lesser capacity, neither of these factors are present. The extent to which facilities are being used is of no importance whatever, for if they are being put to any use at all the very opposite of a state of obsoleteness is indicated.

However, it is apparent that the passage of the Willis-Campbell Act, on November 23, 1921, and the continued refusal of the Commissioner of Internal Kevenue to issue permits for the manufacture of medicinal whiskey, precluded the possibility of any further use for these warehouses than for the storage of the whiskey on hand on November 23, 1921. For this reason, we are of the opinion that the passage of the Willis-Campbell Act marked the beginning of the obsolescence of these warehouses. When the whiskey stored in these warehouses has been finally withdrawn, the latter will have no useful purpose in petitioner’s business, and because of type of construction they can not be adapted or converted to any other purpose than the storage of whiskey in bulk. This latter^fact, coupled with those of location and cost of demolition, indicate that at the close of the obsolescence period the value of these warehouses will be nil. It is impracticable to measure the obsolescence period in terms of years, since it is impossible to foretell the length of time which will pass before the whiskey will be withdrawn. A measure, then, to determine the annual deduction for obsolescence, other than that of effluxion of time, must be applied here.

The warehouses in question had a total capacity of 55,000 barrels; and, while there is no evidence in the record bearing directly on this point, we are inclined to believe, from such facts as we have, that this capacity did not exceed the normal needs of the business. The evidence shows that no wdiiskey was manufactured between May, 1917, and December 31 of that year, because of the restrictions imposed, by the “Food Control” acts, upon the use and transportation of cereals and grains for beverage purposes; and that on January 1, 1918, there were 35,365 barrels of whiskey stored in these warehouses. Had it not been for the restriction imposed by the “ Food Control ” acts, petitioner could have continued to manufacture whiskey during 1917, and the quantity of whiskey on hand, at January 1, 1918, would have been greater by at least the normal production of the fall and winter distilling season of 1917. Considering these circumstances in conjunction with what is common knowledge — that reserve facilities are indispensable in a growing manufacturing business- — we are led to the conclusion that the total capacity of the warehouses was needed in petitioner’s business.

The situation confronting this petitioner, then, on November 23, 1921, when the Willis-Campbell Act was passed, was precisely one in which the useful and valuable capacity of the four bonded warehouses was reduced from 55,000 to 27,393 barrels, with definite indications that no greater capacity could.be used, or would be needed, in the future, and that as the whiskey, then on hand, was withdrawn the useful and valuable capacity would be correspondingly diminished.

The deduction for obsolescence, we believe, like those for depreciation and depletion, should be based upon actualities, as nearly as that may be possible; and this is necessary if the deduction is to be a “reasonable” one as the statute contemplates. To require that the entire obsolescence should be spread and deducted from income as the remaining 27,393 barrels of whiskey, at the close of 1921, are withdrawn, would result in postponing the entire obsolescence deduction to years subsequent to 1921, when as a matter of fact obsolescence was sustained in that year to the extent of the reduction in the useful and valuable capacity of the warehouses. In view of the foregoing, it is our opinion rthat the petitioner is entitled to a deduction, for 1921, for obsolescence of the warehouses, in an amount representing the same proportion of the depreciated cost as the number of barrels representing the reduction in the useful and valuable capacity, plus the number of barrels withdrawn from November 24, to December 31, 1921, to wit: 27,607, bears to 55,000; and that for 1922 petitioner is entitled to a like deduction based upon the proportion which the number of barrels withdrawn during that year, to wit; 1,761, bears to 55,000, or in such manner that when the entire amount of the whiskey has been withdrawn the entire cost of the buildings shall be returned by way of obsolescence and depreciation.

The fifth issue in Eenziehausen’s appeal, which is alternative to the four preceding it, is that respondent erred in refusing to permit deductions from the income for 1918, 1919, 1920, and 1921, for obsolescence of the tangible and intangible properties of the Large Distilling Co.; and for reasons given in our consideration of the first four issues, we hold the respondent committed error only in respect of his denial of a deduction, for 1921, for obsolescence of the four bonded warehouses.

The sixth issue in Eenziehausen’s appeal and the first issue of Henry Schuetz, Jr., is that respondent erred in refusing to permit deductions for obsolescence of good will in computing the income of the partnership of Schuetz, Renziehausen & Co. for 1918, 1919, and 1920. The issue has already been decided adversely to the petitioners in Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626, and in Appeal of Manhattan Brewing Co., 6 B. T. A. 952, and upon authority of these cases we find respondent’s action in denying the claimed deductions is proper.

At the hearing the parties placed in evidence a joint exhibit showing the cost of the physical properties of the Large Distilling Co. at January 1, 1918, and the depreciation sustained in 1918, 1919, 1920, and 1921; and the respondent conceded error in failing to allow deductions for depreciation in those years. The deduction to which the petitioner Renziehausen is entitled for depreciation of the physical assets of the Large Distilling Co. is $16,224.15 for 1918 and $16,173.70 for each of the years 1919 and 1920. For 1921 the petitioner is entitled to a deduction for depreciation, including obsolescence of the bonded warehouses, in the amount of $50,088.70, and to no further deduction for depreciation of the other physical assets enumerated in the findings of fact, because the deduction allowed for that year, in this opinion, for obsoleteness, is inclusive of depreciation. For 1922 Renziehausen is entitled to a deduction for -depreciation, including obsolescence, of the bonded warehouses, in the amount of $2,827.33. This disposes of the seventh issue in Renziehausen’s appeal.

The eighth issue in Renziehausen’s appeal is that respondent erred in including in income for 1920 an alleged profit of $31,015.50 from the sale of certain whiskey. At the hearing respondent conceded error as to this issue; and the parties stipulated that as a result of this adjustment the net income shown in the deficiency notice for 1921 and 1922 should be increased $1,637.14 and $5,248.44, respectively.

The ninth issue in Renziehausen’s appeal is that respondent erred in refusing to tax the profit from the sale of certain whiskey in 1922 as a capital gain at 12% per cent, as provided in section 206 of the Revenue Act of 1921. The whiskey in question was that which had been carried on the books of the Large Distilling Co. in the account captioned “ Old Whiskey.” Petitioner contends that this whiskey was not a part of stock in trade, but his own investment, which had been held for profit for more than two years at the date of the sale; and that the profit derived from the sale thereof in 1922 is a capital gain, subject to tax at 12% per cent.

Section 206 of the Revenue Act of 1921, so far as material here, reads as follows:

That for the purposes of this title:
(1) The term “ capital gain ” means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921;
* * $ * * * *
(6) The term “capital assets” as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.

Renzieliausen, for be and the Large Distilling Co. are the same person, was engaged in the business of distilling and selling whiskey, and as incidents to the conduct of such business, he bought and sold the product of his own plant whenever warehouse receipts were avaiable for purchase, and he matured the excess of each season’s production and sold it to the trade. The petitioner was engaged in more than a distilling business; he was also trading in whiskey. Whiskey was his stock in trade. Beginning in 1908, the excess production of each distilling season was charged on the books of the Large Distilling Co. to the “ Old Whiskey ” account. As this whiskey matured, or perhaps in some cases prior to complete maturity, the whiskey was sold by, and through the organization of the Large Distilling Co. It is not in evidence whether the profits from the sale of this whiskey, as sales were made in prior years, were included in the earnings of the Large Distilling Co. or withdrawn by the petitioner, or credited to his account. The whiskey sold in 1922 was a part of the whiskey carried in this account and represented the accumulation of excess production of several distilling seasons. It was property of a kind which would properly have been included in the petitioner’s inventory, had it been on hand at the close of the year 1922, and, therefore, does not come within the statutory definition of capital assets.

Petitioner makes the alternative contention that all of the income of the Large Distilling Co. for 1922 should be treated as capital gain, since the business was being liquidated from November, 1921, and the inventory became a frozen capital asset when liquidation began. But neither does this contention appear to us to be tenable-Whatever stock in trade the Large Distilling Co. had on hand when liquidation commenced continued to be inventoriable stock in trade until disposed of. Its character was not in the least changed because of the fact that the business was in process of liquidation. We find no error in respondent’s action in refusing to treat the profit derived from the sale of old whiskey in 1922 as a capital gain.

The second issue in the appeal of Henry Schuetz, Jr., is that respondent erred in determining a profit of $260.25 from the sale of certain real property in 1920. No evidence was adduced in support of this allegation of error and the issue is not touched upon in the brief filed by the petitioner after the hearing. The issue has been abandoned, apparently, by the petitioner.

Beviewed by the Board.

In the Appeal of Frederick G. Renziehausen, Docket No. 10658, order of redetermi/nation will be entered on 15 days’ notice, in accordance with Rule 50. In the Appeal of Henry Schuetz, Jr., Docket No. 71¡£8, 'judgment will be entered for respondent as to tKe years 1918, 19%0, and 19M, and an order of dismissal as to the year 1919.


text:
    John W. Sherwood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7748.
    Promulgated September 19, 1927.
    1. Profit on sale of stock held to bave been realized in 1919.
    2. Claimed deduction for bad debt disallowed.

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

      M. E. McDowell, Esq., for the respondent.
    The Commissioner has determined deficiencies in income taxes for the years 1919 and 1920 in an amount in excess of $10,000. The petitioner alleges that the Commissioner erred in determining that the profit from the sale of certain shares of stock in the Penn Oil Co. was received in 1920 rather than in 1919, and further, that the Commissioner erred in refusing to allow as a deduction a bad debt charged off during the year 1920.
    FINDINGS OF FACT.
    Petitioner has been engaged in the purchase and sale of oil in Baltimore, Md., since 1896, and during the taxable years operated there under the trade name of Sherwood Brothers.
    Some time prior to the taxable year petitioner employed Paul Himmelfarb as a salesman in Washington and adjacent territory. The latter suggested to petitioner that they organize a company for the sale of oil products in Washington, and thereafter, pursuant to that suggestion, the Penn Oil Co. was organized with its original plant located at Rosslyn, Ya. The capital was $5,000, which was subscribed for by petitioner and Himmelfarb in equal amounts. At that time Himmelfarb was able to raise only $1,000 and petitioner loaned him the additional $1,500 with which to purchase stock in the newly organized corporation. Thereafter, it was decided to establish a branch in Philadelphia and a piece of property on a railroad siding in that city was leased.
    After a time petitioner and Himmelfarb ceased to agree on matters of business policy. On January 21, 1919, petitioner requested his brother, who was an attorney practicing in Baltimore, to confer with Himmelfarb and arrange either a division of the property of the Penn Oil Co. or a plan whereby Himmelfarb might purchase petitioner’s interest in that corporation. Thereafter a number of conferences ensued between Himmelfarb and petitioner’s counsel for the purpose of arranging a basis for separating their interests. Himmelfarb endeavored to raise sufficient money to purchase petitioner’s stock in the Penn Oil Co., but without success. Petitioner then suggested that he take over the Philadelphia plant and leave the Washington plant to Himmelfarb. To that end the books were audited as of September 30,1919, the audit disclosing a book value for the plant and equipment in Philadelphia of approximately $17,000, which was substantially one-half of the capital and surplus of the corporation. The merchandise on hand at the Philadelphia plant, inventoried at $12,901.12, was to be separately settled for by petitioner. Himmelfarb was anxious to retain the name of the Penn Oil Co. and in order that this might be accomplished it was agreed that the transaction would take the form of a sale by petitioner of his stock in the Penn Oil Co. to Himmelfarb and a purchase by petitioner from the Penn Oil Co. of its plant in Philadelphia.
    Pursuant to the understanding so arrived at petitioner on October 1, 1919, went into possession of the Philadelphia plant and equipment; the name of the Penn Oil Co. was removed from all the property and in its place there was substituted the name of “ Sherwood Brothers,” and the business men with whom petitioner dealt were advised that he was no longer associated with the Penn Oil Co. A new set of books for the Philadelphia branch was opened in the name of Sherwood Brothers, and the income from the operation of the business from October 1 to December 31, 1919, was appropriated by petitioner and was reported by him in his personal income-tax return for the year 1919. At the same time Himmelfarb took over the exclusive management of the business at Rosslyn, Va., which continued to operate under the name of the Penn Oil Co.
    At this time the shares of stock in the Penn Oil Co. were not transferred from the petitioner to Himmelfarb, but were endorsed in blank and turned over to petitioner’s brother; nor was a formal assignment of title to the Philadelphia plant executed. The reason for the delay in delivering the certificates of stock and executing an assignment of the Philadelphia plant to petitioner was that there were certain outstanding obligations of the Penn Oil Co. which petitioner wanted settled, as he was afraid the creditors of the Penn Oil Co. might have recourse against him to the extent of the property taken over by him in Philadelphia. There were also pending two suits against the Penn Oil Co., one by the Triangle Petroleum Co., which was suing the Penn Oil Co. for $8,000 to $10,000, and another suit pending in Philadelphia in which a judgment was demanded in the amount of from $2,000 to $3,000. It was conceded by the parties that the surplus as it existed on the books of the Penn Oil Co. was bound to be diminished as a result of these suits.
    On March 1, 1920, a final settlement was effected. A check was given by Himmelfarb to petitioner in payment for the stock, which check was in an amount equal to the value of the Philadelphia plant. This check was immediately endorsed over to the Penn Oil Co. in payment for the Philadelphia branch. The stock certificates were delivered, and the Penn Oil Co. executed an assignment of the Philadelphia lease on which the plant is located and also assigned the plant and equipment.
    On December 31, 1920, petitioner charged off of his books the sum of $10,412.68, being the account of C. B. Cottman. Cottman operated a service station in Baltimore and the indebtedness was incurred in the purchase of gas and oil from petitioner. Cottman had been a customer of petitioner for several years and had been prompt in the payment of his accounts until November, 1920. He did not pay his account for either November or December, 1920. In December, 1920, Mrs. Cottman called to see petitioner and warned him not to extend further credit to her husband, stating that he had gotten in with a bad crowd and had lost a good deal of money gambling. Petitioner thereupon and during December, 1920, made an investigation of Cottman’s financial condition and ascertained that the title to the property in which Cottman and his wife lived and on which the service station was located was in Mrs. Cottman. He demanded payment of Cottman and was advised that the latter had no money with which to pay. Thereafter during the year 1920 and for a week or more in 1921 petitioner continued to sell goods to Cottman, being induced to do so by reason of the fact that this station was the best distribution point in Baltimore for petitioner’s product known as “ Betholine.” Petitioner also had hopes of making some arrangement with Mrs. Cottman whereby he could continue to operate the service station and between the 5th and 10th of January, 1921, effected an arrangement whereby he would operate the service station for a fixed rental to be paid to Mrs. Cottman, who agreed orally that a certain amount of the rental might be withheld by petitioner for the purpose of liquidating her husband’s indebtedness.
   OPINION.

Arundell:

The petitioner admits receiving a profit of the difference between the cost of his Penn Oil Co. stock, $2,500, and the recorded selling price of it, $17,817.37. He says that this profit was realized in 1919, when he took over the property of the Philadelphia branch of the company. The respondent has placed the profit in income for 1920, the year in which a formal record of the transaction was made.

Sherwood had, in 1919, endorsed his stock and deposited it in escrow with his attorney. He took possession, in 1919, of the property which by the agreement he was to receive for his stock. He notified business men with whom he dealt that ho was no longer connected with the Penn Oil Co. He held himself out, to all who might care to see, as the sole proprietor of the Philadelphia properties by effacing the name “Penn Oil Co.” from all pumps, tanks, etc., and painting thereon his trade name of “Sherwood Brothers.” Sherwood took physical possession of the property on October 1, 1919. According to the list of assets of the Philadelphia branch which was placed in evidence all of the property transferred was personal property, the company owning no real property there. His possession of the personal property pursuant to the agreement was recognized by the parties as valid. The parties having recognized the oral agreement as binding, it is not open to attack by the respondent in the absence of fraud or attempted evasion of taxes.

The meeting of March 1, 1920, was held merely in order to make a formal record of the transfer of property that had been made and because Sherwood and Himmelfarb desired to be fully protected in their possession of the respective properties. As we have pointed out above, Sherwood had the Philadelphia property and insofar as he was concerned the meeting held in 1920 was not necessary. As to Sherwood’s stock, while it was not delivered to Himmelfarb until 1920, the evidence shows that Sherwood considered that after he had indorsed it and turned it over to his attorney in 1919 he had nothing further to do with it and that he had surrendered it.

In view of the agreement between the holders of all the stock of the Penn Oil Co. and their subsequent acts, designed to carry it into effect, it is our opinion that an effective transfer took place in 1919, and the petitioner realized his gain in that year.

The remaining question is whether the Cottman account in the amount of $10,412.63, is a proper bad debt deduction for the year 1920. The facts with respect to this account do not convince us that the petitioner had determined it to be worthless in the taxable year. While the debtor had no property it appears that the petitioner had hopes of continuing his sales at the Cottman location which would naturally result in liquidation of at least part of the account. Then, too, it is worthy of note that during the remainder of the year, after the financial condition of Cottman had been ascertained, and until a lease on the property was secured in 1921, the petitioner continued to furnish supplies to the allegedly worthless debtor. It is difficult to square, such action with a claim that the account was ascertained to be worthless.

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

Considered by LaNsdoN and StekNHaoeN.


author: Sternhagen :

text:
    Max Baumann, Harold L. Sanger, and Maud Sanger, Executors, Estate of Elias A. Sanger, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6981.
    Promulgated September 19, 1927.

      Louis W. Osterweis, Esq., for tlie petitioners.

      Arthur H. Fast, Esq., for the respondent.
    This proceeding involves an aggregate deficiency of $2,576.78 income tax for the years 1920 and 1922. Only that portion of the deficiency which relates to the year 1922, $1,816.34, is in controversy, and this results from the respondent’s disallowance of certain bad debts as deductions.
    FINDINGS OF FACT.
    Elias A. Sanger died on July 11, 1924, and letters testamentary were duly issued to these petitioners on July 30, 1924, by the Surrogate’s Court of the County of New York.
    Elias A. Sanger loaned to his brother, Lou Sanger, on the following dates the amounts set opposite thereto :
    February 1, 1916-$1, 000
    August 15, 1917_ 1, 000
    December 12, 1917_ 500
    May 24, 1920_ 1, 000
    June 22, 1920_ 1,500
    Total_ 5, 000
    These loans, aggregating $5,000, were made to assist Lou Sanger in the operation of a business conducted by him in the City of New York. They were evidenced by notes representing respectively the amount of each of the loans. Lou Sanger entered the amounts of these loans in his cash book on the dates they were made.
    The business of Lou Sanger proved tó be unprofitable, and on December 16, 1921, the decedent gave him $2,500 to enable him to clean up all his obligations to his creditors and wind up his business. In January, 1922, after paying all creditors, Lou Sanger closed his business and had no remaining assets of any nature. After closing the business he started working at $50 a week, and never since has he been in a financial condition to repay any part of the loans. He has never repaid any ^rt of these loans nor has he made any effort to do so.
    Elias A. Sanger had no interest whatever, financial or otherwise, in the business conducted by his brother.

      Elias A. Sanger had personal knowledge of his brother’s financial condition, and acting under the advice of his accountant he deducted the amount of $7,500 from his income-tax return for the calendar year 1922.
   OPINION.

Sternhagen :

The foregoing findings of fact are, except as to the item of $2,500, substantially as submitted by the petitioners’ counsel, and are in accordance with the evidence. It is clearly established that petitioners’ decedent loaned to his brother as a business loan all but this $2,500, and that the financial condition of Lou Sanger was such as to prevent an ascertainment of the worthlessness of these loans until 1922. They were then clearly worthless and charged off, and are properly deductible in the taxable year.

As to the last item of $2,500, the situation, however, is different. This amount was given under circumstances which make it incredible that it was considered as a loan. The business had proven to be unprofitable, Lou Sanger had no money, and the decedent expressly gave the $2,500 to enable his brother to “ clean up all his obligations to his creditors and wind up his business.” We think that this amount was a gift, and therefore not deductible.

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

Considered by Lansdon and Arundell.


author: Lansdon:

text:
    Fannie W. Johnson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 15301.
    Promulgated September 19, 1927.
    Value of plantation at March 1, 1913, determined.

      L. L. Hamby, Esq., G. W. Dudley, Esq., and M. O. Garter, G. P. A., for the petitioner.

      W. F. Gibbs, Esq., W. H. Lawder, Esq., and Brice Toole, Esq., for the respondent.
    In this proceeding petitioner seeks a redetermination of her income tax for the year 1219, for which the respondent has determined a deficiency of $1.2*033.47. The petitioner alleges error on the part of the Commissioner in his determination of the value of the Panther Burn Plantation at March 1, 1913, as a basis for determining the gain or loss upon the sale of that plantation by the petitioner in 1919. The specific errors alleged are in respect to the value of cultivated land, land under hardwood timber, land under cypress timber, hardwood-timber values, and cypress-timber values. The value of the improvements, equipment, and personal property has been agreed by the parties at interest to be $168,940.32.
    FINDINGS OF FACT.
    Petitioner is an individual and a resident of Vicksburg, Miss. She inherited from her father at the time of his death in 1906, the plantation known as “ Panther Burn,” containing 12,357 acres, and situated in Washington and Sharkey Counties, Miss. She was the owner of this plantation on March 1, 1913, and continued to be the owner thereof, until May 1, 1919, when she sold it for $1,200,000, upon the following terms: $400,000 was paid in cash on the date of the sale, and the remainder was- represented by 10 promissory notes of the vendees in the amount of $80,000, each, payable on the 1st day of May of each successive year, with interest at the rate of 6 per cent per annum from the date until paid, the first note being payable on May 1, 1920, and the last note payable on May 1, 1929. Subsequent to the sale the petitioner, during the calendar year 1919, received from the vendees, in addition to the foregoing, $16,485.72, as reimbursement to her of certain expenses incurred by her in connection with the operation of the plantation. She also incurred $5,114.75 legal expenses which she paid out in connection with the sale of the plantation.
    This plantation, on March 1, 1913, contained 6,767 acres of cultivated land; 4,285 acres of land covered by hardwood timber, and 1,305 acres of land covered by cypress timber. The plantation, which was divided into three parts, having a manager in supervision of each part in respect of the cultivated area, was divided into lots of from 10 to 40 acres each, each lot being rented out to tenants, together with the tenant houses and all improvements contained on each lot. There were several hundred tenant houses, three managers’ houses, a mansion for occupancy by the owner of the plantation, and several auxiliary buildings, such as servants’ quarters, barn and garage, all built of sound cypress timber. There were also numerous corncribs, cotton houses, seed houses, three cotton gins, blacksmith shop, two schoolhouses, one for white and one for colored people, two churches, one for white and one for colored people, and a large, well-stocked plantation store, all of which belonged to and formed a part of the plantation, and all of which was in full operation.
    There was one main road or highway going through the center of the plantation and separate roads leading from each of the three parts of the plantation to the owner’s mansion, to the churches, schoolhouses, blacksmith’s shop, and the store. All of the tenant houses were accessible to the roads leading to all parts of the plantation. There were three bridges across a stream, known as “ Deer Creek,” which runs through the plantation. The main line of the Yazoo & Mississippi Valley E. E. runs through the property, and a railroad station, known as “ Panther Burn ” was located thereon. The entire plantation was completely fenced and its population, including the tenants and their families, was about 1,500 people.
    There were four deep artesian wells on the place and a water service pump at each tenant house.
    The improvements and personal property on the plantation, consisting of various buildings, machinery, bridges, delco plant, farming implements, seed inventory, accounts receivable, stock in the store, and mules, were stipulated to have been of the value on March 1, 1913, of $168,940.32. The property was regarded as the best plantation in that section of Mississippi, was well organized, and enjoyed the highest reputation. The principal crop grown was long-staple cotton, which was sold under the trade name of “ Panther Burn ” and had an established reputation for its high quality.
    The land covered in hardwood timber, which was adjacent to the cultivated land, contained the same character of soil as the cultivated land and, when cleared, was equally, if not more, productive. The land covered by cypress timber was of a very rich character and quite susceptible of cultivation when cleared and drained.
    There were the following quantities of various kinds of growing timber on the plantation: 27,351,000 feet of high-grade cypress, including only trees 12 inches in diameter and upwards to 30 inches in diameter; 20,885,000 feet of hardwood timber, of which 11,857,000 feet were gum of 12 inches and upwards in diameter; 1,235,000 feet of overcup oak 14 inches and up in diameter; 729,000 feet of red oak .14 inches and up in diameter; 1,086,000 feet of elm 14 inches and up in diameter; 223,000 feet of ash 10 inches and up in diameter; 136,000 feet of cottonwood 12 inches and up in diameter; 494,000 feet of miscellaneous hardwoods and 5,125,000 feet of small timber, being less than the foregoing diameters in respect of the various kinds.
    All of the timber was close to and easily accessible to the Yazoo & Mississippi Valley E. E., which ran through the plantation.
    All of the tenant houses were occupied and the plantation enjoyed the reputation of having thoroughly contented tenants.
    On March 16, 1919, about six weeks before the sale in question, a cyclone struck the plantation and made a path approximately 400 yards wide and extending throughout the main body of the hardwood timber, a distance of several miles, blowing down all the trees in its path and seriously damaging 3,000,000 feet of the timber thereon. This cyclone also blew down the mansion and killed the petitioner’s husband, who, ever since the petitioner had owned the plantation, had been in sole and complete charge of it. This cyclone also destroyed several tenant houses.
    Petitioner was 63 years of age, and she had never had any experience in managing or running a plantation of this sort, or any other kind, and, upon the death of her husband, was advised by her closest friends to make a quick sale of the entire plantation, and was told that if it remained unsold and without any competent head or management, demoralization would result and heavy losses would follow. Petitioner, thereupon, immediately placed the matter in the hands of her friend and advisor, former Governor John M. Parker, of Louisiana, who, within the course of a few days, made arrangements to effect a walk-out sale of the entire plantation to four individuals, Senator Percy, B. O. McGee, a Mr. Dean, and a Mr. Wood, for $1,200,000, upon the terms hereinbefore stated. The plantation was never advertised for sale. The four men to whom it was sold were individuals who were well known in the community, financially responsible, thoroughly familiar with the territory and willing to pledge themselves to carry out every contract made with every tenant on the property and generally to see that the place was conducted as it had always been conducted. An offer of $100,000 more in this brief time was made for the place; but it was not accepted.
    In October, 1919, five months after the sale of the plantation, the purchasers sold the timber on it for $500,000.
    The value of petitioner’s plantation at March 1,1913, was as follows:
    Cultivated land, 6,767 acres, at $SO.OO- $541, 300. 00
    Land under hardwoods, 4,285 acres, at $22.50- . 96, 412. 50
    Land under cypress, 1,305 acres, at $3.00- 3, 915. 00
    Gum, 11,520,000 feet, at $3.41 per M- 39, 2S3. 20
    Overcup oak, 1,200,000 feet, at $6.50 per M- 7, 800. 00
    Red oak, 708,000 feet, at $5.20 per M- 3, 681. 60
    Ash, 1,056,000 feet, at $8.77 per M- 9, 261.12
    Mixed cypress, 2,688,000 feet, at $6.66 per M_ 17, 902. 08
    Cottonwood, 132,000 feet, at $4.88 per M- 644.16
    Miscellaneous, 480,000 feet, at $1.95 per M- 936. 00
    Cypress, 27,551,000 feet, at $6.66 per M- 183,489. 66
    904, 685. 32
    Plus agreed value of personal property and improvements- 168, 940. 32
    Total value_:_ 1,073, 625. 64
    The profit arising from the sale in 1919 is the difference between $1,211,370.91 and $1,073,625.64, or $137,745.33.
   OPINION.

Lansdon:

The plantation here in question was sold early in the year 1919 for a total consideration of $1,211,370.97. The respondent asserts that a substantial profit, based on the fair market value or price of the property at March 1, 1913, was realized. The only question before us is the fair market value or price of the property at the basic date. Each party called numerous witnesses, and the evidence is the voluminous opinion and expert testimony of such witnesses. After careful study and analysis of the entire record of the proceeding, we have determined the values of the various categories of which the property consisted at March 1, 1913, as set forth supra in our findings of fact.

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

Considered by Steenhagen and AhtjNdell.


author: Millieen:

text:
    H. H. Brown Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7967.
    Promulgated September 19, 1927.
    1. Percentages of certain debts beld properly deductible as worthless in the year 1922.
    2. Massachusetts state and town taxes which become a liability and accrued within a fiscal year are allowable deductions from gross income in such year.

      Thomas Proctor, Esq., and John T. Drury, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
    This proceeding results from the determination by the respondent of a deficiency in income and profits taxes for the fiscal year ended June 30, 1922, in the amount of $3,734.79. The deficiency is due to the disallowance by the respondent of deductions claimed for debts alleged to have been ascertained to be worthless and charged off within the year, and for local and state taxes accrued.
    FINDINGS OF FACT.
    Petitioner is a Massachusetts corporation with principal office at North Brookfield. It maintained its books of accounts and reported its income for the fiscal year ended June 30,1922, on the accrual basis. It was engaged in the business of the manufacture and sale of shoes until June 30, 1922. On that date, Charles C. Beebe, who was and is its president, and, together with his family, the principal stockholder, wished to retire from active business and turn the same over to his associates. The H. H. Brown Shoe Co. was accordingly organized to carry out this purpose. The business of petitioner was taken over by the new corporation on June 30, 1922. Thereafter, petitioner carried on no active business, but remained in existence only for the purpose of winding up its affairs.
    During the month of June, 1922, the president of petitioner and the bookkeeper went over a list of all accounts receivable. From their combined knowledge of financial conditions of the respective debtors, together with their belief as to possible future collections, they concluded that certain percentages of five debts were uncol-lectible, and the president accordingly directed the bookkeeper to charge off on the books of account such percentages as worthless. During the month of August, 1922, one of the employees of petitioner advised its president th&t a reserve should have been set up and the percentages of the worthless debts charged to the same, which was ordered done.
    The J. W. Jenkins Shoe Co. account had been running since 1920. The company had stores at Dallas, Tex., and Shreveport, La. The financial difficulties of the company were caused by a large purchase of shoes just prior to a decline of 50 per cent in the price of shoes. Jenkins, the president of the company, was a personal friend of the president of petitioner and often called upon the latter for guidance and advice in the conduct of his business. The financial condition of the company was well known to the president of petitioner. In June, 1921, the financial condition of the company became precarious, and the creditors, including petitioner, met and agreed to accept participating certificates for 55 per cent of their accounts and notes payable at future dates for the remaining 45 per cent. Subsequently, during the year 1922, the creditors, including petitioner, held several meetings, to consider the financial condition of the company. Some of the creditors continued to consign goods to the company, despite its financial condition. These creditors, however, refused to continue to consign goods to the company, unless all the creditors made an assignment of their accounts. Such assignment to an adjuster was made in August, 1923, and Jenkins assigned the assets he had at that time for the benefit of his creditors. The company account on petitioner’s books at the end of the fiscal year was $11,077.64. The last payment prior to the end of the fiscal year was for $186, made on May 19, 1922. During the month of June, 1922, the president of petitioner concluded that not more than 25 per cent of the company’s accounts could be collected and instructed the bookkeeper to charge off 75 per cent thereof as worthless. Subsequently, during the years 1922 and 1923, petitioner collected $2,248.32.
    An account owed petitioner by the Hollins Shoe Co., at the end of the fiscal year 1922, totaled $3,009.63 and had been running since 1920, in which latter year the company had become financially involved. Hollins, the president of the company, had stated to the petitioner that the company had disposed of ail their assets save some real estate. With this information and knowledge of the value of the real estate, the president of petitioner concluded, in June 1922, that not more than 25 per cent of the account was collectible and gave directions for 75 per cent of the account to be charged off as noncollectible.
    The account of D. W. Brunell Shoe Co. with petitioner, on June 80, 1922, was $1,286.05. It had been running since 1920 and 1921. The company made an assignment to A. W. Cox & Co. during the year 1921. Soon after such assignment, the assignee sent a statement to all creditors, showing that about 66 per cent could be expected to be collected if the assets were realized upon in full. By June 30, 1922, petitioner had received 25 per cent. The president of petitioner concluded, in June 1922, that not more than 25 per cent of the remaining balance could be expected and gave directions for the charging off of the remaining 75 per cent thereof. Subsequent to June 30, 1922, petitioner collected $526.02.
    On June 30, 1922, a firm known as Basch, Jacobs & Schur owed petitioner $727.20. The president Gf petitioner, based upon his knowledge of the financial condition of the debtor, gave instructions to the bookkeeper to charge off 75 per cent of the account as uncol-lectible on June 30, 1922. On August 2, 1922, the creditors of the debtor accepted a settlement for 25 cents on the dollar.
    An account of $96.51 appeared on petitioner’s books on June 30, 1922, against the Bank of Greenwood, and was due to the failure of the bank between the time a check thereon was mailed by a customer and the presentation for collection by petitioner. The president of petitioner, based upon a knowledge of the resources of the bank, concluded that not more than 50 per cent thereof could be collected and directed his bookkeeper to charge off 50 per cent thereof before June 30, 1922. Subsequent to June 30, 1922, the sum of $58.45 -was collected.
    On June 30, 1922, petitioner followed its theretofore established practice of accruing local and state taxes, by setting up a reserve in the amount of $3,821.24. Such taxes were paid to the State of Massachusetts and the town of North Brookfield, on September 26, 1922, in the amounts of $2,522.71 and $1,264.85, respectively. The Massachusetts taxable year commences on April 1 of each year and the taxes are due and payable in the October following.
    On September 27, 1922, petitioner received from the H. H. Brown Shoe Co. cash, as follows, to reimburse petitioner for portions of the state and local taxes, which the shoe company had theretofore agreed to pay: state taxes, $946.02, and town taxes, $948.64.
   OPINION.

Millieen:

The first issue relates to the five accounts appearing on petitioner’s books at June 30, 1922, totaling $16,197.03 and upon which a deduction of $12,149.45 is claimed. The action of the president of petitioner in charging off on the books of account the percentages recited in the findings of fact was based upon his detailed knowledge with respect to each account. The ascertainment of the worthlessness of a debt, either in whole or in part, is the exercise of sound business judgment based upon as complete information as is practicably obtainable. The president of petitioner, acting upon the detailed information known to him, reached the conclusion that the petitioner would not be able to recover more than certain percentages of the debts in question. Subsequent collections verified his judgment. We are of the opinion that the respondent should have allowed the deductions claimed by petitioner.

The taxes paid to the commonwealth of Massachusetts and to the town of North Brookfield resolve themselves into two classes — -(1) direct taxes on real estate and personal estate, and (2) corporation excise taxes. In Massachusetts taxes on real estate are assessed in the town where it lies, to the person who is either the owner or in possession thereof on the 1st day of April of each year. (Sec. 11, ch. 59, Gen. Laws of Mass. 1921.) Personal estate is assessed to the owner in the town where he is a resident on April 1. (Sec. 18, ch. 59.) Section 37 of chapter 60 provides depart:

Taxes assessed upon land * * * shall with all incidental charges and fees, be a lien thereon from April first in the year of assessment * * *.

Section 19 of chapter 60 provides:

If the assessors are of opinion that the credit of a person taxed is doubtful or that he is about to leave the commonwealth, they may, by a special warrant, direct the collector forthwith, without demand or notice, to compel payment by distress or imprisonment, whether the tax is payable immediately or at a future day, by installments or otherwise.

Section 35 of chapter 60 reads:

If a tax remains unpaid for three months after commitment to the collector, he may maintain an action in his own name against the person assessed therefor in the same manner as for his own debt.

At the time of the decision in Richardson v. Boston, 148 Mass. 508; 20 N. E. 166, the day of assessment was May 1 instead of April 1, as it now is. In that case the facts were that certain real estate in Boston was assessed as of May 1,1883, to the then owner. On May 25, 1883, the Commonwealth took the property under the right of eminent domain. The Supreme Judicial Court held that the owner on May 1 was liable for the tax although the lien had been lost, since the Commonwealth was after May 25, both the owner of the property and entitled to tax. After pointing out that the earlier remedies in Massachusetts for the collection of taxes were distress, arrest and suit, the court said:

Ií, as we think, it is plain that the giving of a lien upon real estate did not displace the earlier remedies of distress and arrest, we can perceive no reason why the existence of such a lien should cut down the absolute generality of the words of the act of 1859. We, therefore, are of opinion, as we have said, that owners of real estate, properly taxed for it, are personally liable for the tax. See Sherwin v. Boston Five Cents Saving Bank, 137 Mass. 444; Cochran v. Guild, 106 Mass. 29, 30; Burr v. Wilcox, 13 Allen, 269, 272; Wilson v. Shearer, 9 Met. 504, 506; Sherwin v. Wigglesworth, 129 Mass. 64. As the plaintiffs were personally liable as of May first, and as the failure actually to assess and to collect the tax on that day does not affect their legal position, it has not been argued that, if they had paid them, they could have recovered, as on a partial failure of the consideration of the tax. No such argument could prevail. The plaintiffs, if they have been deprived of their land, have the price paid them in its place, untaxed for the current year. Moreover, when a personal liability is imposed, it might be difficult to say that the consideration of the tax is solely the protection of the particular parcel of land, although the lien is confined to that. Jennings v. Collins, 99 Mass. 29, 32. Hayden v. Foster, 13 Pick. 492.

In Rogers v. Gookin, 198 Mass. 434; 85 N. E. 405, the court said:

All taxes upon real estate are assessed, not primarily to the land but “ as to the person who is either the owner or in possession.” Pub. Sts. c. 11, Sec. 13, St. 1889, c. 84. Richardson v. Boston, 148 Mass. 508, 510. The provision is comparatively new that all taxes on real estate should be a lien, distress and arrest being the earlier remedies.

The corporation excise tax as imposed by section 32 of chapter 63, General Laws of Massachusetts, 1922, is assessed as of April 1 of the taxable year. The basis of the assessment is the excess of the fair cash value on that date of the shares of capital stock over certain deductions plus the net income of the corporation as shown by its last Federal income-tax return. In Springdale Finishing Co. v. Commonwealth, 242 Mass. 37; 136 N. E. 250, the court held that this tax was an excise on the right of a domestic corporation to do business or as the court quaintly put it, “ an excise for the commodity of carrying on business.” The Finishing Company had on July 29,1920, conveyed all its property to a Delaware corporation. It dissolved in September, 1920. One question was whether the corporation was liable for the whole tax since it had ceased to do business in July and had dissolved in September. The court answered this question as follows:

The effect of this statute was to impose an excise for the commodity of carrying on business by a domestic corporation for a less period than one year or in cases where such business was not carried on for an entire year.

Under the above authorities, it is clear that all the taxes for which petitioner set up reserves were obligations of the corporation on and after April 1, 1922. The question is whether such taxes were accruable under petitioner’s method of accounting.

In Ernest M. Bull, Executor, v. Commissioner, 7 B. T. A. 993, we held that the estate tax imposed by the Revenue Act of 1918, accrued at the death of the decedent and could be deducted in that year if the books of the estate, which were kept on an accrual basis, accrued the tax as of that year. We there held that there was no merit in the contention that the taxes which were a fixed liability as of the death of a decedent were not deductible, where accounts of the estate were kept on an accrual basis, for the reason that such taxes were not due and payable until one year after the death of the decedent, and that such postponement of payment was merely remedial or procedural. In the present case the same line of reasoning obtains. In both cases the taxes were actual and real personal obligations existing in the year in which it was sought to take the deduction. It was pointed out in the Bull case that the exact amount of the tax could not be ascertained until all valuations and adjustments had been made. With respect to this contention, we said:

The suggestion arises that it is difficult to determine the amount of the estate tax within the period when the first income tax of the.estate must be computed and the return audited. This might well give pause. But it is usually no more difficult than the computation of the munitions tax involved in the Vale & Towne case or that required by section 1207 of the Revenue Act of 1920 and the earlier regulations, and such difficulty as there may be is not sufficient to counterbalance the considerations already set forth.

The basic idea under the accrual system of accounting is that the books shall immediately reflect obligations and expenses definitely incurred and income definitely earned without regard to whether payment has been made or whether payment is due. Expenses incurred in the operations for a particular year are properly accrued in the accounts for that year, although payment may not be due until the following year. Under the accrual system, the word “ accrued ” does not signify that the item is due in the sense of being then payable. On the contrary, the accrual system wholly disregards due dates. Reither is it necessary that the amount of an incurred liability be accurately ascertained in order to accrue it.

We are of the opinion that the taxes paid by petitioner to the Commonwealth of Massachusetts and to the town of Worth Brookfield in October, 1922, were liabilities of petitioner on April 1 of that year and were, under petitioner’s system of accounting, deductible from the gross income of the fiscal year ending June 30,1922.

Reviewed by the Board.

Judgment will be entered on Id days’ notice, wnder Bule SO.


author: Milliken :

text:
    C. R. Thomas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7139.
    Promulgated September 19, 1927.
    A member of a partnership is not individually taxable on so much of the partnership income as is attributable to an interest in his interest in the partnership which, at the date of the formation of the partnership', he had sold to a third person, although such purchaser was not a member of the partnership.

      Harry G. Weeks, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    This proceeding involves a deficiency in income tax for the calendar year 1919, in the amount of $1,077.61. Petitioner contends that respondent has erred in adding to his gross income the sum of $5,900, which he asserts was the income of another person.
    FINDINGS OP PACT.
    In the early part of 1919, Roscoe Parks purchased an outfit of oil-drilling tools for which he paid $6,000. About the same time he sold a one-half interest therein to petitioner for $3,000, and the two entered into partnership, under the firm name of Roscoe Parks Drilling Co., the principal business of which was drilling of oil wells. On the same day on which this partnership was formed, or the day after, petitioner sold a half interest in his one-half interest in the partnership to his daughter, Mary V. Townsend, a widow. The consideration for this transfer was $1,500, which the daughter paid at the time, by check, out of funds derived from insurance on the life of her deceased husband. Parks was never informed of this transaction. The Roscoe Parks' Drilling Co. entered into other transactions in which Mary Y. Townsend had no interest.
    The net income of the Roscoe Parks Drilling Co. for the calendar year 1919 from all sources was $32,234.76. Petitioner’s share was $16,117.38. The share of the profits of Mary V. Townsend arising from her purchase from petitioner was $5,942.69. This amount was paid to her on December 24, 1919, by petitioner, out of the profits of Roscoe Parks Drilling Co. She returned the whole amount as part of her gross income and paid the tax thereon.
    In 1920, Roscoe Parks Drilling Co. was dissolved, at which time Mary V. Townsend was paid her share of the net proceeds arising from the dissolution.
   OPINION.

Milliken :

The transaction between petitioner and his daughter Mary Y. Townsend was a sale of capital assets. If the interest purchased by the daughter had been sold for more than cost, there would have been taxable gain; if for less than cost, deductible loss. The daughter purchased not an interest in profits alone, but a one-half interest in petitioner’s one-half interest in Roscoe Parks Drilling Co., hereafter referred to as the Drilling Company. It is true she / was never a member of that partnership, but she was a partner with I petitioner. As between her and petitioner there existed a partnership not only as to profits but also as to corpus. If petitioner had defaulted on his contract, the. daughter would have been entitled to bring an action against him and in that action to have made Parks a party for the purpose of an accounting. See Nirdlinger v. Bernheimer, 133 N. Y. 45; 30 N. E. 561. Petitioner held his daughter’s interest in trust for her. Cf. Barnes v. Alexander, 232 U. S. 117.

While the daughter was not entitled to share as a member of the Drilling Company in the profits of that partnership, and while such share was payable in the first instance to petitioner, yet the instant he received what was in reality her share he at once held her share as trustee for her. This is true for the reason that as between him and her, he was no longer the owner of the share which he had sold to her. The $5,942.69 which she received was income from the investment which she had made through petitioner in the Drilling Company. This income was, as to her, taxable income and as such has been properly returned and taxed. This income which was taxable to the daughter was not, under the facts of this case, at the same time taxable also to petitioner. He held it as trustee, and since it was at once distributable, he had the right under section 219 of the Revenue Act of 1918 to deduct it from the gross income of the trust.

This conclusion is not in conflict with the decisions in Appeal of Samuel V. Woods, 5 B. T. A. 413; Appeal of Fred W. Warner, 5 B. T. A. 963; Appeal of Ormsby McKnight Mitchel, 1 B. T. A. 143; and Mitchel v. Bowers, 15 Fed. (2d) 287; 6 Am. Fed. Tax Rep. 6329. In each of these cases the transaction involved was the transfer to another of income which arose from the property of the transferor and in each case it was held that such transfer did not lessen the taxable income of the owner of the property from which the income was derived. In this case petitioner did not assign income produced or to be produced from his property. He sold an interest in hisb interest in the Drilling Company. It was the daughter’s interest in the corpus which produced her share of the income. The Mitchel case contained another important element which is not present in this case. The contract between Mitchel and his wife was revocable by either party.

The gross income of petitioner for 1919 as determined by respondent should be reduced by the sum of $5,900, the amount claimed in the petition.

Reviewed by the Board.

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