source: Caselaw Access Project

author: Matthews:

license: Public Domain

text:
    James N. Purse, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54124.
    Promulgated February 11, 1933.

      Wm. P. Smith, Esq., for the petitioner.

      Nathan Gammon, Esq., for the respondent.
   OPINION.

Matthews:

It is the petitioner’s contention that the respondent erred in refusing to allow the profits of the Detroit branch of Purse Brothers, a partnership, to be divided equally between the petitioner and his son, G. Roe Purse. Petitioner claims in the alternative that, if it be determined that petitioner’s son was not a member of the partnership in 1928 and therefore was not entitled to share in the profits of the business, the amount of $7,580.11 paid over to the son for the fiscal year ended September 30, 1928, represented compensation for services actually rendered by the son and such amount should be treated as an ordinary and necessary expense of the business instead of being added to the one-half of the partnership profits of Purse Brothers which was reported by the petitioner.

We have found that in his individual income tax return for 1928 G. Roe Purse reported salary from Purse Brothers in the sum of $3,020 and further reported under the heading of “ Income from Partnerships ” the sum of $7,580.11 “ for services rendered Purse Brothers.” This amount of $7,580.11 was not set up on the books of the partnership as an expense item, which would be the usual procedure if it represented compensation for services. A credit balance of $15,160.22 was transferred on October 1, 1928, to a new account entitled “ Surplus or Uncredited Profit ” and entries subsequently made indicate that one-half of this amount, or $7,580.11, was ultimately credited to G. Roe Purse. If it be determined that G. Roe Purse was entitled to receive this amount as a member of the partnership, it will be unnecessary to consider the petitioner’s alternative claim.

Petitioner’s son began working for his father when he was a boy attending school and was “ brought up in the business.” He had been devoting his entire time and energies to the business for six or seven years prior to the taxable period involved herein and had rendered valuable services to the partnership. He went on buying trips and handled about one-half of the purchases of vegetables. He looked after the shipping end of the business, the operations of the trucks and the sales and deliveries from cars on the track. Petitioner’s son had drawn $10 a week from the partnership in 1921 and his salary had been increased several times until by 1927 he was receiving $60 a week. In order to keep his son interested in the business petitioner promised to make him a partner. Accordingly, when it was decided that Artie Purse should go to Toledo to manage the Toledo branch of the business, petitioner’s son was taken into the partnership and thereafter received one-half of the profits of the Detroit branch.

An examination of the record discloses that, after Artie Purse gave up his interest in the Detroit business and took over the Toledo branch, the petitioner intended that G. Roe Purse should receive one-half of the profits of the Detroit business in lieu of the straight salary which he had been getting. However, the son continued to use his drawing account of $60 a week and reported the sum of $3,020 as salary from Purse Brothers in addition to reporting one-half of the uncredited profits of the partnership. Petitioner testified at the hearing that this amount of $3,020 should have been deducted from the son’s one-half of the profits. This is in accordance with a statement appearing in a written protest filed on behalf of petitioner under date of November 11,1930, as follows:

In comparing the return, however, an error was made, in that an item of §3,020 was used as a deduction in arriving at the profits from the Detroit branch of the business. This §3,020 represents the amount of partnership profits actually drawn by G. Roe Purse.

We do not have before us tbe question of the son’s tax liability, so we need not consider whether he reported more income than he was entitled to receive. It suffices to say that the son did report the amount of $7,580.11 as his distributive share of the income of the partnership.

The partnership known as Purse Brothers had been operating since 1912 as a kind of “ family affair.” Its business was handled in a very informal manner with respect to making agreements and keeping records. Petitioner was the only person to put any money into the business and each partner contributed personal services. Although various changes were made from time to time in the members of the partnership and the terms upon which each individual partner agreed to devote his services to the business, no agreement in writing was ever executed with regard to a division of the partnership income.

After Artie Purse went to Toledo in the fall of 1927, petitioner was left entirely in control of the Detroit branch of the business. His son was a valued employee of the partnership, upon whom the petitioner greatly relied. Petitioner testified that his son was worth more than an individual outside the family rendering the same services and it is natural to suppose that the son took a special interest in building up the business which he might some day inherit. The record contains ample evidence upon which to base the opinion that the son was taken into partnership by the petitioner with the understanding that the son should share equally with the petitioner in the profits of the Detroit business. We accordingly hold that the respondent erred in including in petitioner’s taxable income for 1928 all of the profits of the Detroit branch of the business.

Judgment will be entered for the 'petitioner.


text:
    Winthrop Ames, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42288.
    Promulgated February 11, 1933.

      Burton E. Eames, Esq., for the petitioner.

      Arthur Octmduff, Esq., for the respondent.
   OPINION.

Matthews:

There is no dispute as to the facts in this case or as to the computation of the deficiency. The sole question presented is whether the loss sustained by the petitioner in 1922 is a net loss within the meaning of section 204 of the Revenue Act of 1921 so that the unabsorbed portion thereof may be deducted in computing petitioner’s taxable income for 1924. In order to constitute a net loss which may be applied against petitioner’s income of succeeding years in accordance with the provisions of the statute it must be shown that the loss resulted from the operation of a business regularly carried on by the petitioner. It is pertinent to determine what was the business of the petitioner in 1922 and whether the loss which the petitioner is here seeking to deduct arose from the operation of the petitioner’s business in that year.

We have found that in 1912 petitioner organized a corporation, Office of Winthrop Ames, Inc., to engage in the business of producing plays, which business he had been conducting as an individual. From the time of organization of the corporation until it was liquidated in 1922 the corporation was the medium through which the petitioner carried on his work of selecting, producing and financing theatrical productions. Petitioner owned all of the outstanding stock of the corporation and no one else was associated with him in managing the affairs of the corporation. Petitioner financed the corporation in all its undertakings, supplying the necessary capital for the business by making personal loans to the corporation. There was not charged off on petitioner’s books at any time prior to 1922 any loss on account of advances made by him to the corporation. The corporation sustained continuous losses from the date it was organized to and including the year 1920. In 1921 the corporation books showed a profit. In 1922 the corporation, being unable to repay the advances made by petitioner, confessed judgment in favor of the petitioner in the sum of $719,223.68. The amount of the judgment was subsequently reduced to $504,372.18. Petitioner took over all the assets of the corporation and the corporation was liquidated. For 1922, 1923 and 1924 the business as conducted by the petitioner was profitable.

The respondent does not deny that the corporation was the medium through which the business of selecting and producing plays was carried on, but argues that the loss sustained by the petitioner in 1922 was a loss on account of a bad debt or from an investment that became worthless in that year and did not represent a net loss which might be carried over as a deduction from income of succeeding years. We agree with respondent’s contention that the loss suffered by the petitioner in 1922 as a result of the liquidation of the corporation, Office of Winthrop Ames, Inc., does not represent a loss incurred in the operation of the petitioner’s business within the purview of the statute. This loss did not result from the production of plays in 1922 by either the petitioner or the corporation, but grew out of the inability of the corporation to repay the loans made to it by the petitioner over a period of eleven years. The corporation had operated at a loss each year through 1920, but the business was profitable from 1921 to 1924, inclusive. After the petitioner took over the corporation’s assets in 1922 he continued the business in his own name.

Petitioner was not regularly engaged in organizing and financing corporations or in buying and selling corporate securities. He was the sole stockholder of Office of Winthrop Ames, Inc.; only $1,000 in stock was ever issued of a total authorized capital of $10,000. As stated above, when the corporation was liquidated petitioner’s loss was not limited to that of a mere stockholder in a corporate enterprise, but included the entire net amount advanced by him to the corporation, which had remained an open account upon his personal books throughout the life of the corporation. Until 1922 petitioner expected the corporation ultimately to become profitable. It is clear that this total amount owing to him by the corporation in 1922 can not be considered to be a business loss sustained by the petitioner in that year.

Since the hearing of this proceeding the Supreme Court of the United States has decided three cases in each of which the point is made that a corporation and its stockholders are generally to be treated as separate entities: Burnet v. Clark, 287 U. S. 410; Dalton v. Bowers, 287 U. S. 404; and Burnet v. Commonwealth Improvement Co., 287 U. S. 415. The first two involved claims for net losses by stockholders. In the Clarrh case it was held by the Supreme Court that certain losses which the taxpayer sustained by reason of having to pay corporate notes which he had endorsed and from selling corporate stocks did not give rise to a net loss under the Revenue Act of 1921. In the Dalton case it was held that the loss sustained by the taxpayer upon the dissolution of a corporation organized by him represented a loss of his investment in the stock of the corporation and was not attributable to the operation of a trade or business within the meaning of the net loss provisions of the statute.

Although the facts of those cases are not identical with the facts of the instant case, we consider that the circumstances of the instant case are not such as to remove it from the application of the principles laid down in those decisions. We conclude that the petitioner is not entitled to the deduction which he is claiming herein.

Reviewed by the Board.

Judgment will be entered for the respondent.


text:
    J. Bertram Lippincott and Bertha Lippincott Coles, Executors of the Estate of Walter Lippincott, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49233.
    Promulgated February 11, 1933.

      J esse I. Miller, Esq., for the petitioners.

      L. 8. Pendleton, Esq., for the respondent.
   OPINION.

Matthews:

The underlying and controlling question in this case is whether the transfers by the decedent, upon which the disputed deficiency in tax was computed, were in fact made in contemplation of death. The pertinent section of the statute, section 302 (c) of the Revenue Act of 1926, is quoted in the margin. It will be seen that section 302 (c) contains two provisions. Under the first provision the value of transfers made at any time in contemplation of death, except by a bona fide sale, is required to be included in the decedent’s gross estate. The second provision, which raises a conclusive presumption that gifts made within two years prior to the decedent’s death were made in contemplation of death, has been held by the Supreme Court of the United States to be unconstitutional (Heiner v. Donnan, 285 U. S. 312.)

At the hearing of this proceeding it was strongly urged on behalf of the petitioners that, inasmuch as there was deducted in the instant case the sum of $5,000 as an exemption, the respondent was relying upon the conclusive presumption provision of section 302 (c) of the Revenue Act of 1926, and that since the Supreme Court declared that provision to be unconstitutional in the Dormcm case, supm, the burden was on the respondent to show that the transfers involved herein were actually made in contemplation of death. We see no merit in this argument. Since the pronouncement of the Supreme Court that the conclusive presumption provision of that section is unconstitutional, the petitioner has the right to introduce evidence to show that the transfers, whenever made, were not in fact made in contemplation of death. This is not equivalent to relieving the petitioner of the burden of proving the respondent’s determination to be erroneous.

In the instant case the respondent has not admitted that the transfers were not actually made in contemplation of death. The record does not indicate that the respondent, in including in the gross estate the value, in excess of $5,000, of the property transferred to the decedent’s daughter, was relying solely upon the conclusive presumption raised by section 302 (c). The burden of proof of the facts relative to the transfers has not been shifted from petitioners to the respondent. Cf. Estate of John Joseph Garvan, 25 B. T. A. 612.

We have carefully considered the evidence introduced on behalf of petitioners and have reached the conclusion that the transfers to the decedent’s daughter were in fact made in contemplation of death.

It is urged on behalf of petitioners that the decedent was contemplating a second marriage and that he deeded his real estate to his daughter so that he could remarry upon his own terms. We do not consider the evidence sufficient to support the contention that the conveyances were made in contemplation of marriage. Had the property been conveyed to the woman he desired to marry the case would be stronger in favor of the petitioners’ claim that decedent was not thinking of his approaching decease. But let us briefly consider the circumstances surrounding the gift to his daughter of property valued at approximately a million dollars.

At the time of executing the deeds in question decedent was seventy-seven years of age and had been in a wheel chair for nearly four years. Since being stricken with hemiplegia in 1922 he had been unable to walk without assistance. He had four trained nurses to wait on him. He was in very poor physical condition and although he remained cheerful he must have known that his days were numbered. His daughter was his only child and it was fitting that he should have conveyed to her the property which she would have inherited upon his death. She was the natural object of his bounty and there is nothing unusual in his having made these transfers prior to his death. She agreed that during the remainder of his life the decedent should have the use of his estate “Alscot ”, where he had resided for thirty-five years. We consider that the transfers were testamentary in character, under all the circumstances of the case. It is not controlling whether the decedent apprehended that death was near at hand. Decedent did actually die within less than ten months after making the transfers, but our conclusion would be unchanged if he had lived for a considerably longer period of time. As was said by the Supreme Court of the United States in the case of United States v. Wells, 283 U. S. 102, 117: “ Death must be c contemplated ’, that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition.” In this case the dominant motive, without which the transfers would not have been made, was the decedent’s desire that his daughter should come into possession of the real estate which he deeded to her. See Anneke v. Willcuts, 1 Fed. Supp. 662. This is not inconsistent with the hope on his part, however faint, that he might sufficiently regain his health to contract a second marriage.

There remains to consider whether the respondent erred in his valuation of certain property which was included in the gross estate.

With respect to the real estate located at the northeast corner of Sixth and Locust Streets in the City of Philadelphia, we are of the opinion that the decedent’s undivided one-third interest therein had a value on the date of the decedent’s death of $48,746.66. In reaching this determination we have taken into consideration the amount of rental received, the size of the lot, its corner location and the prices at which the adjoining lots sold in 1928. We do not consider that the amount for which the property was assessed for purposes of local taxation is necessarily a reliable criterion to be used in estimating its fair market value.

We are of the further opinion that the property known as “Alscot ”, Bryn Mawr, Pennsylvania, had a value of $243,000 on the date of the decedent’s death. This is the amount at which it was valued by an expert real estate appraiser who was familiar with the property and who testified that it was worth $12,000 an acre, including improvements. He based his opinion on the comparative prices of sales made of similar properties and he pointed out that the property would likely have to be divided into lots and developed before it could be disposed of to the general public; that there is practically no sale for an estate of that size at a figure approximating its cost to the owner, but frequently an estate can be subdivided and improved and then placed on the market at prices which will insure a fair return on the investment. His testimony is the only evidence contained in the record which has any bearing on the question of the valuation of this real estate and we consider that it is entitled to considerable weight.

No evidence having been introduced with respect to the value of the shares of stock of J. B. Lippincott Company which decedent owned at the time of his death, the respondent’s valuation of $100 per share, or $50,600, must be sustained.

In recomputing the deficiency there should be included in the gross estate the full amount of the value at the date of decedent’s death of the real estate conveyed to the decedent’s daughter in contemplation of death. The elimination of the exemption of $5,000 will not increase the deficiency determined by the respondent since we have reduced the respondent’s valuation of two of the parcels of real estate.

Reviewed by the Board.

Judgment will he entered wider Bule 50.

       Sac. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      ****** *
      (c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. * * *


author: Matthews :

text:
    Jean Conrad, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46343.
    Promulgated February 11, 1933.

      Stanley Sw/dam, Esq., and Walter G. Moyle, Esq., for the petitioner.

      Nathan Gammon, Esq., for the respondent.
   opinion.

Matthews :

This proceeding arises upon the determination by the respondent of a deficiency in petitioner’s income tax for the year .1927 in the amount of $3,482.58. A single issue was raised upon the pleadings, whether the respondent erred in using as the basis for determining the amount of gain realized on a sale in 1927 of property received by the petitioner as a legacy, the value of the property at the time of the testator’s death in 1924; the petitioner contends that its value in 1925, when the property was distributed to her by court order, should have been used.

The facts were stipulated and are as follows :

The petitioner is an individual residing at San Francisco, California. Petitioner’s husband, a resident of California, died August 4, 1924 and his estate was distributed to the legatees on November 12, 1925, by order of the Superior Court of the State of California. On November 12, 1925, as a part of her legacy from her husband, there was distributed to petitioner from her deceased husband’s estate certain stocks, bonds, and rights to purchase stocks. During the year 1927 and prior to October 1, 1927 petitioner sold a portion of said stocks, bonds and rights so received for the sum of $204,423.79. These stocks, bonds and rights sold by petitioner in 1927 had a value as of August 4,1924, the date of the death of the petitioner’s husband, of $141,831.41, which amount was the appraised valuation used in determining the Federal Estate Tax and California State Inheritance Tax upon the estate of petitioner’s husband. These stocks, bonds and rights sold by petitioner in 1927 had a value as of November 12, 1925, the date upon which they were distributed to petitioner as a part of her legacy from her husband, of $169,693.
In her income tax return for 1927 petitioner reported as capital net gain $34,730.79, the amount by which $204,423.79, the sum received from the sale in 1927 of these stocks, bonds and rights, exceeded $169,693.00, the value of these stocks, bonds and rights on November 12, 1925, the date of their distribution to the petitioner as a legatee of her husband. In the deficiency notice of September 24, 1929, from which this petition was filed the Commissioner increased the capital net gain reported from this transaction by the amount of $27,861.59 by using the appraised value of these stocks, bonds and rights as at August 4, 1924, the date of the death of petitioner’s husband, as a basis for determining the capital net gain on the sale thereof rather than their value at the date they were distributed to petitioner.

The relevant provision of the statute is set out in the margin.

The main issue is very easily disposed of on the authority of Brewster v. Gage, 280 U. S. 827. The stocks and securities here were apparently a specific legacy from the petitioner’s husband, but even if they had been part of the residue of the estate the result would be the same. In the Brewster case, the Supreme Court considered the question of the residue of the testator’s estate, saying:

Petitioner’s right later to have his share of the residue vested immediately upon testator’s death. At that time petitioner became enriched by its worth, which was directly related to and would increase or decline correspondingly with the value of the property. And, notwithstanding the postponement of transfer of the legal title to him, Congress unquestionably had power and reasonably might fix value at the time title passed from the decedent as the basis for determining gain or loss upon sale of the right or of the property before or after the decree of distribution. And we think that, in substance, it would not be inconsistent with the rules of law governing the descent and distribution of real and personal property of decedents to construe the words in question to mean the date of death.

The revenue acts before the court were those of 1918 and 1921, but it considered the later revenue acts, including those of 1926 and 1928, and pointed out the similarity of language of this provision in all the revenue acts until that of 1928 and the consistency of the Government’s interpretation of those acts. The sweeping language of the court leaves no room for further question: “ The generality of the words used in both acts indicates intention that the value at the time of death of the decedent was to be taken as the basis in all cases.”

We are of the opinion that the value of the property at the time of the testator’s death is to be taken as the basis for determining the gain to the petitioner on the subsequent sale. The gain on the sale was reported as capital net gain and calculated under section 208 (b), set out in the margin. As the respondent raises an objection to this basis of calculation only if value is taken as of the petitioner’s receipt of the property under the court decree in 1925, we need not consider this further contention.

This brings us to the petitioner’s alternative contention, that if the proper basis of value is that at the testator’s death, only one-half the amount of the legacy is taxable to her as “ property * * * acquired by bequest, devise, or inheritance”; since it was, petitioner contends, community property under California law and only one-half of such property passes on death to the surviving spouse. This issue was not raised by the petitioner on the pleadings or at the hearing and appears first in her brief. It is too late to raise it now. Moreover, it is open to two fatal objections: (1) The petitioner has not shown that the property was community property. On the contrary, it is described in the stipulation as “ part of her legacy from her husband.” (2) Even if it were conceded to be community property, the petitioner has not shown that so much of it as was potentially the wife’s when acquired by the community estate had at the time of such acquisition a value greater than at the testator’s death; for if one-half of this property is not to be regarded as coming to the petitioner as a legacy and its basis of value determinable, therefore, under section 204 (a) (5), we must fix its basis as cost to the petitioner as required by subsection (a) of the same section. For these reasons, it is unnecessary for us to give this issue consideration.

Judgment will be entered wider Bule 50.

       [Revenue Act of 1926.] Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property aeguired after February 28, 1913, shall be the cost of such property; except that—
      *******
      (5) If the property was aeguired by beguest, devise, or inheritance, the basis shall be the fair market value of such property at the time of sueh acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in subdivision (e) or (e) of section 402 of the Revenue Act of 1921, or in subdivision (c) or (f) of section 302 of the Revenue Act of 1924, or in subdivision (c) or (f) of section 302 of this Act.

       Sec. 208. (b) In the case of any taxpayer (other than a corporation) who for any taxable year derives a capital net gain, there shall (at the election of the taxpayer) be levied, collected and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:
      A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount plus 12% per centum of the capita) net gain.


author: Aeundell:

text:
    George E. Saulsbury, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59453.
    Promulgated February 11, 1933.

      Joshua W. Miles, Esq., for the petitioner.

      Dean P. Kimball, Esq., and Edward G. Adams, Esq., for the respondent.
   OPINION.

Aeundell:

From the stipulation of facts filed herein, which, by reference, we adopt as our findings of fact, it appears that the petitioner and his wife, residents of Baltimore, Maryland, in 1928 owned certain personal property as tenants by the entirety. In the separate return filed by the wife for 1928, she, with the consent of petitioner, reported for taxation all of the income derived from bank accounts, bonds, stocks, and profits on a stock trading account, which she and her husband held as tenants by the entirety. The respondent transferred one-half of such income to the return of petitioner and determined a deficiency of $423.53 in income tax for 1928. Whether this action was proper is the only question presented for decision. We think it was.

It is firmly established law in Maryland that, in the absence of an agreement between them to the contrary, neither spouse is entitled to all of the fruits of property held as tenants by the entirety. In Masterman v. Masterman, 129 Md. 167; 98 Atl. 537, a sum of money had been paid by an insurance company for a fire loss on premises, title to which was held as tenants by the entirety. The husband refused to restore the property with the insurance money, or use his share thereof for that purpose. In holding that if the property was sold by order of the court the proceeds of the sale, together with the insurance money, should be invested under the court’s order and the net income therefrom distributed equally between the two tenants until the death of one, when the corpus should be paid to the survivor unless sooner distributed either by agreement of the parties or the court’s order, the court remarked:

In this state the constitutional provisions and the Married Women’s Acts have changed the common law in some respects. * * * So the expression in Marburg v. Cole, McCubbin v. Stanford, Brewer v. Bowersox, Stieff Co. v. Ullrich, 110 Md. 634, 73 Atl. 874, and probably other cases, that the estate by entireties with its incidents continues as at common law, is not necessarily to be construed to mean that a husband is still entitled to all of an estate by entirety as at common law, as such rights in the husband were not as incidents of that estate, but by virtue of the rights of a husband at common law. * * *
* * * Such being the law of this state, it would be illogical and incorrect to say that the husband still has the same control over their property held as tenants by the entireties that he had by virtue of his common-law rights.

The same conclusion was reached in Brell v. Brett, 143 Md. 443; 122 Atl. 635, on an issue involving the right to the proceeds of sale of a farm and a mortgage given by the purchaser. In a more recent case, Whiteloch v. Whitelock, 156 Md. 115; 143 Atl. 712; involving not only the principal sum of a mortgage, all of which was being claimed by the husband and one-half by the wife, but accumulated interest thereon, the court stated the prevailing law in this way:

At common law, the appellant, by virtue of his control of the wife’s property, would have been entitled to all of the income. As affected by statute, however, from time to time, the control of the husband over the wife’s property has changed, until now, under the Married Women’s Property Acts (Code Pub. Gen. Raws 1924, art. 45, §§ 1-21), in this state the wife shares equally with the husband in the income from a tenancy by the entireties. The authority for this statement is Masterman v. Masterman, 129 Md. 167, 98 A. 537, in which the history of tenancy by the entireties, with the changes wrought by statute in the respective rights of husband and wife therein, have been so exhaustively treated in the opinion of Chief Judge Boyd that a discussion of the subject here would involve nothing but needless repetition. Furstenburg v. Furstenburg, 152 Md. 247, 136 A. 534, 35 A. L. R. 151.

While all of the cited cases relate to real property, tenancies by the entirety in personal property may exist in Maryland. Tyler v. United States, 281 U. S. 497; Brewer v. Bowersox, 92 Md. 567, 48 A. 1060; Whitelock v. Whitelock, supra.

It is clear from these decisions that during 1928 the petitioner was entitled to one-half of the income in question in the absence of an agreement with his wife for the distribution of the earnings on a different basis. It does not appear, and it is not claimed that such an agreement was ever entered into. The petitioner and his wife were of the opinion that when filing separate returns they had a right with the consent of each other to place income in accounts held by the entireties on the return of either husband or wife.” Such an understanding as existed between them did not extend beyond the manner of reporting the income after it was earned and received under their entirety interests. Upon realization of the income from the entirety estate, one-half of it was the income of each and should be so treated in their separate returns. Poe v. Sanborn, 282 U. S. 101.

Decision will be entered for the respondent.


author: Black :

text:
    L. J. Christopher Company of Delaware, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 17448.
    Promulgated February 13, 1933.

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

      Nathan Gammon, Esq., for the respondent.
   OPINION.

Black :

Our findings of fact and opinion in this proceeding were promulgated October 2, 1928, and are reported at 13 B. T. A. 729.

On March 16, 1928, after this proceeding, together with proceedings in Docket Nos. 8931 and 16085, had been set for hearing at Los Angeles, California, on April 17, 1928, the respondent filed with the Board a motion asking that an order be made limiting the issues .to be tried at the hearing to the issues defined in subdivisions (a) ;and (b) of Rule 62 of the Board. In other words, respondent moved ■that the hearing to be held in Los Angeles, California, be limited :to issues not involving sections 327 and 328 of the Revenue Act of 1921. This motion was granted on the day on which it was filed. The fact that this motion had been filed and granted was at the beginning of the hearing brought to the attention of the presiding member of the Division to which the proceeding was assigned, at Los Angeles, and the Board’s action in granting this motion was not revoked.

Although the effect of granting the motion of the respondent was to preclude both the petitioner and the respondent from submitting any evidence upon the question of the right of the petitioner to special assessment under the provisions of sections 327 and 328 of the Revenue Act of 1921, the Division, without first setting another hearing at which evidence could be submitted, proceeded to render an opinion in which it denied the right of the petitioner to the benefits of section 328 of the Revenue Act of 1921. The decision was not reviewed by the Board.

On August 14,1929, a petition for review was filed with the Court of Appeals of the District of Columbia.

On December 14, 1931, this proceeding was remanded to the Board for further proceedings not inconsistent with the opinion of the Court of Appeals of the District of Columbia, which is reported at 55 Fed. (2d) 532.

It is now contended by petitioner that this reversal of the Board’s decision amounts to a mandate to the Board to allow petitioner special assessment. We do not agree with this contention.

A reading of the opinion of the court in the light of the assignment of error to be decided, we think will show that the court did not intend to make its decision as broad as its statement of the issue would indicate. The court as a preface to its opinion stated the issues to be decided under enumerations (1) and (2). Issue (1) concerns waivers and the statute of limitations and is not relevant to any issue now to be decided. Issue (2) was stated by the court as follows:

Whether, in the absence of fraud or other irregularity, a circuit court of appeals may review a decision of the Board of Tax Appeals sustaining a determination by the Commissioner of Internal Revenue that the appellant was not entitled to have its profits taxes determined especially under sections 327, 328 of the Revenue Act of 1921. In other words was appellant entitled to have its profits tax computed under the provisions of sections 327 and 328 of the Revenue Act of 1921, and if so, whether or not appellant has waived the right to have that question reviewed on appeal.

We think the statement of the issue by the court in (2), as above quoted, was somewhat broader than the issue the court was about to decide. As already pointed out at the beginning of this opinion, the Board had granted respondent’s motion to confine the hearings in the first instance to issues other than special assessment. This was, in fact, carried out at the hearing and neither party offered any evidence with especial reference to the issue of special assessment. Notwithstanding this state of facts, the Board erroneously rendered decision against petitioner on the issue of special assessment and naturally petitioner in its appeal to the Court of Appeals of the District of Columbia assigned this action of the Board as error. The attorneys for the Commissioner did not undertake to defend the action of the Board in passing upon and denying the claim for special assessment, conceding that it was error, but contended that petitioner lost its right to complain of the error by failing to file a motion with the Board asking for a rehearing, calling the attention of the Board to the error which it had committed. The Court of Appeals of the District of Columbia denied this contention of the Commissioner and, as we have stated, reversed the decision of the Board and remanded the proceeding for further proceedings not inconsistent with the opinion of the court. We construe this mandate to be an instruction to the Board to give the petitioner a hearing on the issue of special assessment, and this we have done.

An additional reason for adopting the above construction of the court’s mandate and not adopting the construction which petitioner has urged upon us, is that the Supreme Court has held that the courts are without power to review the decisions of the Commissioner denying special assessment under sections 327 and 328. Williamsport Wire Rope Co. v. United States, 277 U. S. 551; Duquesne Steel Foundry Co. v. Burnet, 283 U. S. 799. We must assume that the court did not intend to do that which the Supreme Court has held it has no power to do.

On March 15, 1932, the proceeding came on for hearing, in compliance with the mandate of the court, before a Division of this Board, and at this hearing it was agreed between petitioner and respondent, without petitioner waiving in any manner its contention that the Board was specifically instructed by the mandate of the court to grant special assessment, that no new evidence would be offered by either party on the issue of special assessment, but that the issue should be submitted on the pleadings, and the evidence of record in Dockets 8931, 16085, and 17448, heretofore heard and decided by the Board.

So the issue we have to decide is whether petitioner is entitled to special assessment under the facts proved at the hearing at Los Angeles, California, April 17-18, 1928, in Dockets 8931, 16085, and 17448. The facts proved at said hearing are set forth in our findings of fact, reported in 13 B. T. A. 730 to 736, to which reference is hereby especially made.

We have reexamined all the evidence offered at the original hearing and we find no reason to change the findings of fact promulgated October 2,1928, and reported in 13 B. T. A., supra. Upon those facts we hold that petitioner has not shown that it is entitled to special assessment.

The assignments of error contained in the petition with reference to special assessment are as follows:

The determination of tax set forth in the notice of deficiency is based upon the following errors:
(a) The erroneous conclusion that the invested capital of the petitioner could be determined.
(b) The erroneous conclusion that there were present during the period, in the income and invested capital of the petitioner no abnormal conditions which would justify the bureau in computing the profits tax of petitioner under the provisions of Section 328 of the Revenue Act of 1921.

It is perfectly true, as said by the Court of Appeals of the District of Columbia, in its opinion above referred to, that when the L. J. Christopher Company of California transferred its assets to the L. J. Christopher Company of Delaware, the latter corporation acquired a mixed aggregate of tangible and intangible assets- for stock and cash. The nature of the assets conveyed by the California corporation to the Delaware corporation are set out in the bill of sale which reads as follows:

Fob a Valuable Consideration, receipt of which is hereby acknowledged, L. J. Christopher, Company, a corporation, organized and existing under and by virtue of the laws of the State of California, hereinafter referred to as the vendor, of the one part, hereby grants, conveys and assigns to L. J. Christopher Company, a corporation, organized and existing under and by virtue of the laws of the State of Delaware, hereinafter referred to as the vendee of the other part, all that certain personal property consisting of the stock of goods, wares, and merchandise, materials, manufactured articles, machinery, trucks, equipment, and all personal property owned by the vendor herein and which is now in and about those certain premises heretofore operated by said vendor on Lots 1, 2, 3, 9, 10, and 11, of Tract No. 2651, in Los Angeles City, and all property, including good will, owned by said vendor, save and except real estate (including buildings) and cash (including bills and accounts of every kind outstanding). It is understood and agreed between sai'd parties that all of the said properties are free from encumbrances.
[Signed] L. J. Christopher Co.,
a California Corporation.
By L. J. Christopher, Pres.
Alfred Beaudry, Seer.

For these assets petitioner paid $125,000 in cash and $125,000 in preferred stock. There is no evidence as to the separate values of the property conveyed by the above quoted bill of sale. There is no evidence of the values of such property as set upon the books of petitioner.

Presumably these values were equal to the price which petitioner paid for such property, but whether that is true or not, petitioner was entitled to include the price paid for them as invested capital, subject to whatever limitations are imposed by section 326 of the Revenue Act of 1921. There is no evidence that respondent imposed any limitations under said section in computing petitioner’s invested capital, and so far as the facts before us show, respondent allowed petitioner invested capital to the extent of every cent it paid for the assets which it acquired by the bill of sale.

Now it is perfectly true that if the Commissioner, because of the fact that this mixed aggregate of tangible property and intangible property was paid in for petitioner’s stock, was unable satisfactorily to determine the respective values of the several classes of property at the time of payment or to distinguish the classes of property paid in for petitioner’s stock, petitioner would be entitled to special assessment, as provided in section 328 of the Revenue Act of 1921. But we have searched the entire record carefully and we find nothing to show that the Commissioner labored under any such inability. On the contrary, the Commissioner appears to have allowed petitioner all the invested capital to which it has shown itself entitled under the law. The record shows that respondent allowed petitioner invested capital for 1921 of $279,745.85.

In the case of Cramer & King, 13 B. T. A. 399; affirmed in 41 Fed. (2d) 24, where a taxpayer was seeking special assessment on the ground that installation costs of machinery had been charged to expense but there was no evidence that such costs could not be determined, the Board denied special assessment, holding that a taxpayer should be held to a reasonable diligence in determining its invested capital and it is only after a showing of reasonable diligence and the resulting inability then to establish invested capital that the relief provisions would be applied. Special assessment was denied for the same reason in Edwin M. Knowles China Co., 9 B. T. A. 1292, and Duquesne Steel Foundry Co., 15 B. T. A. 467; affd., 41 Fed. (2d) 995; 283 U. S. 799, where no proof was submitted of invested capital allowed by the Commissioner, nor the basis used in its computation. Cf. Cohn Goldwater Co., 15 B. T. A. 970; Semon Bache Co., 20 B. T. A. 275.

All that petitioner has shown in the instant case in respect to its invested capital is that a mixed aggregate of tangibles and intangibles was paid in for petitioner’s stock, but it has certainly not proved that the Commissioner was either unwilling or unable to determine the respective values of the property so paid in. We have no evidence before us showing or tending to show that the Commissioner has failed to allow petitioner all the invested capital to which it is entitled under the law. We find no evidence in the record showing either an abnormality of income or an abnormality of invested capital and this being the state of the evidence, special assessment is denied.

Reviewed by the Board.

Decision will he entered for the respondent.


author: Lansdon:

text:
    Estate of L. W. Mallory, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 33231.
    Promulgated February 13, 1933.

      E. 8. Snyder, Asy., and If. =7. Holland, Asy., for the petitioner.
    J. i?. Johnston, Esq., for the respondent.
   OPINION.

Lansdon:

No evidence was introduced at the trial of this cause to show that the items grouped as “traveling expenses” which petitioner claims were legal deductions from decedent’s income in the years reviewed. Without some proof as to what these disbursements were for we are unable to hold that the respondent erred in rejecting them as legal deductions from income for the years to which they relate and his action in reference to them is therefore approved. Barnett Weiss, 3 B. T. A. 228; E. S. Frischkorn, 7 B. T. A. 431; E. L. Potter, 20 B. T. A. 252; and Golding & Hahn Co., 15 B. T. A. 499.

The petitioner’s next claim is that the taxpayer sustained losses in the respective amounts of $13,500 and $21,000 in the years 1923 and 1924, through the sale of capital stock in the Homer Land and Cattle Company. The record shows that the decedent was responsible for the organization of the Homer Land and Cattle Company, and that on August 24, 1923, he became the sole owner of its stock then outstanding. The corporation lost money from its beginning, and he paid its bills and loaned it money for which he was paid, in part, with stock at par, which he assigned to his son at book value, as set out in our findings of fact.

The evidence convinces us that the sales of stock made by decedent to his son in October, 1923, and November 1924, were bona fide transactions for adequate consideration and that after such dates the son was the owner of the stock in question. If the cost of the stock so disposed of is proved by the record, the petitioner is entitled to the deductions claimed. Paul Akers Bowden, 26 B. T. A. 1410.

The record discloses that on August 24, 1923, the decedent became the sole owner of all the outstanding stock of the corporation, to which he thereafter loaned substantial sums of money, evidenced in all instances by the promissory notes of the borrower. To the extent of $15,000 in 1923 and $35,000 in 1924, such notes were surrendered and canceled in consideration of the issuance of unissued stock of the corporation to him in the respective quantities of 150 and 350 shares, so that at November 24, 1924, he was the owner of all the outstanding stock of the corporation, except as above set out. In these circumstances we think it is clear that all the advances represented by the unpaid promissory notes of the corporation must be regarded as capital contributions and, therefore, that the stock cost the decedent $100 per share. Howard W. Starr, 1 B. T. A. 681; cf. Chicago, Indianapolis & Louisville Ry. Co., 10 B. T. A. 1143.

The petitioner contends that all the transactions through which the decedent acquired the stock of the corporation were entered into for profit. The record discloses that the elder Mallory always took notes for advances to his son and to the corporation. The notes of the son were secured by collateral and one payment of $300 was made on that which was taken in 1923. The loans to the corporation were evidenced by promissory notes, some of which were paid in cash and the balance by the issuance of stock. Decedent was a successful business man, but like most such men he sometimes embarked on enterprises that were unprofitable. In our opinion the evidence clearly disproves that he had any intention of giving his son the various amounts which he advanced to acquire the stock of the corporation and finance its operations.

Respondent also argues that, in any event, Mallory’s subsequent purchase of a like number of shares of the same stock from the corporation at par, as shown in the record, brings the transactions within section 214 (a) (5), which provides that no losses shall be recognized in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale the taxpayer has acquired substantially identical property, etc. The evidence shows that the purchases of additional stock here considered were not made within the thirty-day limit provided for in the section above cited. It is therefore clear that such provision does not affect the issues here involved. On this issue the determination of the respondent is reversed. The decedent was entitled to deduct the amounts of $13,500 and $21,000, respectively, from his gross income in his income tax returns for 1923 and 1924.

Decision will be entered under Rule 50.


author: Black:

text:
    Guaranty Building & Loan Company of Marion, Indiana, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55352.
    Promulgated February 20, 1933.

      L. L. Hamby, Esq., for the petitioner.

      Lloyd W. Greason, Esq., for the respondent.
   OPINION.

Black:

The petitioner contends that it is exempt from taxation under section 231 (4) of the Revenue Act of 1926, which reads as follows:

The following organizations shall be exempt from taxation under this title—
* ***** *
(4) Domestic building and loan associations substantially all the business of which is confined to making loans to members; and cooperative banks without capital stock organized and operated for mutual purposes and without profit.

Respondent contends that petitioner is not exempt because it is not a domestic building and loan association within the meaning of the above quoted section of the 1926 Revenue Act. During the year 1911 the Legislature of Indiana enacted the Organic Building and Loan Association Act. Section 1 of that act is printed in the margin. The Legislature of Indiana in 1913 enacted a statute authorizing the formation of rural loan companies, denominated therein as “Rural Savings and Loan Associations.” As pointed out in our findings of fact, petitioner was incorporated April 2, 1924, under the provisions of the 1913 statute. Sections of that statute which ar8 deemed relevant to a decision of the issue involved in this proceeding are printed in the margin.

The principal ground urged by respondent in the instant case as to why petitioner should not be classed as a building and loan association is that control of the organization is by statute placed in the hands of guaranty stockholders and such stockholders are entitled to receive preferential treatment in the distribution of profits and, subject to claims of creditors, are entitled, upon dissolution, to the surplus created. On this point we may point out that there is nothing in the Federal statute which restricts exemption to building and loan associations that do not issue guaranty stock.

Guaranty or nonwithdrawal permanent capital stock is authorized to be issued by building and loan associations in the manner and with the same responsibility and liability as that here involved, in the following States: Arkansas (see Laws of 1929); Colorado (see Session Laws of 1896, 1897, 1907, 1920). In “History of Building and' Loan in the United States,” by Morton Bodfish, at page 332, the following is stated in respect to Colorado:

In 1920 the first three permanent stock companies were organized. [Naming them.]
Nearly all associations formed since that time have been organized on the permanent or guaranty stock plan. Building and loan associations have had their greatest growth since 1920 * * *.

California (see Special Session of 1907, ch. 412; Statutes of 1909, Civil Code, Title XVI, secs. 633 to 648 (a)). In that state the associations are authorized to operate either on the guaranty plan or without the issuance of guaranty stock. Kansas (see Laws of 1899, ch. 78); Oregon (see Code of 1931, enacted June 11) ;■ and Wyoming (see Session Laws 1927, ch. 103).

We think our decision in the instant case is controlled by the decision of the Supreme Court in United States v. Cambridge Loan & Building Co., 278 U. S. 55, affirming the Court of Claims in Cambridge Loan & Building Co. v. United States, 63 Ct. Cls. 631. There the Government contended that, because the Cambridge Association loaned most of its funds to nonmembers during the years under the 1918 Act, and received most of its funds used for loans from nonmembers in all the taxable years, and because it paid a fixed rate of dividend to prepaid stockholders different from that paid or credited to the installment or running stock members (the borrowing members) and therefore claimed by the Government not to be mutual; and because it loaned money for other purposes than the building of homes for the occupancy of members; and because a borrowing member was not required to subscribe to stock ini an amount equal to his loan (being only required to subscribe to one or more shares) and being permitted to have its payments credited to the loan rather than upon the stock subscribed for; and because it accepted deposits, paying interest thereon, in amounts far beyond the needs of its borrowing members and loaned them to nonmembers when there was no application therefor by members; and because it invested some of its funds in purchasing outstanding mortgages on real estate that were given to secure loans advanced by others; and because its methods of operation were not in accord with orthodox methods that were employed by the original unincorporated building societies; it was therefore not a building and loan association within the meaning of the Acts of 1918 and 1921 (containing the same provisions as section 231(4) of the Revenue Act of 1926), although all of those things to which exceptions were taken were permitted by the laws of the State of Ohio, where the association was organized and was doing business. The Court of Claims overruled these contentions of the Government, and held that the Cambridge Association was exempt from taxation. The Supreme Court affirmed this decision, Justice Holmes delivering the opinion of the court, and, among other things, said:

But for sucli an association to start it must have some money to lend, and the typical member does not have it. Long before Congress dealt with, loan and building associations, an esteemed writer upon the subject had insisted on the reasonableness of allowing them to issue full paid stock with fixed dividends, both in his book and upon the bench. Endlich Building Associations, 2d Ed. (1895) Sec. 462; Folk v. Capital Savings & Loan Association, 214 Pa. 529, 534, 544, 63 A. 1013 (1906). The same author recognized depositors (Sec. 56) and with more or less qualification the right to lend to outsiders (Sees. 314 et seq.) and to borrow (Secs. 297 et seq.). Under the Ohio statute the respondent had these powers, and still, as we have said, is called a building and loan association by that state. The same name was commonly used in other states and similar powers were given with more or less restriction. When Congress exempted such associations from the income tax of course it was speaking of existing societies that commonly were known as such, not of ideals that would have been hard to find and this is not left to inference alone. * * * The statutes speak of “domestic” associations, that is, associations sanctioned by the several states. They must be taken to accept with the qualifications expressly stated what the states are content to recognize, unless there is a gross misuse of the name.

It is clear from the facts detailed in our findings of fact that petitioner is recognized by the State of Indiana as a building and loan association. We do not deem it necessary to restate the facts connected with petitioner’s organization and operation. These things have been fully detailed in our findings of fact. Suffice it to say that we think these facts are sufficiently similar to the facts in United States v. Cambridge Loan & Building Co., supra, as to cause that case to rule our decision in the instant case. Cf. South Euclid Savings & Loan Co., 14 B. T. A. 1079; Richland County Building & Loan Assn., 15 B. T. A. 537.

A decision in favor of petitioner on the first issue makes it unnecessary that we decide petitioner’s alternative contention.

Reviewed by the Board.

Decision will be entered for the petitioner.

       Sec. 1. That every association heretofore or hereafter incorporated under any law providing for the incorporation of building, loan fund and savings associations, and every association heretofore or hereafter incorporated under any law for the purpose of assisting its members to accumulate and invest their savings, by accumulating a fund from periodical payments on its stock, or otherwise, to be loaned among its members, shall be known in this act as a building and loan association. Such associations organized under the laws of this state shall be known as “ domestic ” associations, and those organized under the laws of any other state, territory or nation, shall be known as “ foreign ” associations.

       [Burns Annotated Indiana Statutes (1926), chapter 27.]
      Section 5127. Powers, Duties, Obligations. — 2. Rural loan and savings associations organized under this act shall have and may use the rights, powers and privileges herein given and allowed, and also those of (the) domestic hvilding and loam association (s) under the lams of this state, and shall be subject to the duties, the examinations and the regulations therein and herein provided, but the bonds, notes and mortgages given by its members and the evidence of debt and of security of the association, and the endorsement, assignment or transfer thereof shall be subject only to the provisions of this act. [Italics supplied.]
      Section 5129. Common Stock, Shares. — 4. The shares of common stock shall be the same as shares of stock in said domestic building and loan associations, except that said shares herein are nonvoting and the holder or owner has no liability thereon after the par value is paid into the association, and the manner of payment may be as provided and classified in the by-laws of the association; the guaranty stockholders in the association shall be jointly and severally liable, in addition to the par value of their guaranty stock, in a sum equal to the amount of their several holdings of that stock to pay any unsatisfied debt or liability of the association after all the assets and every other resource of the association shall be exhausted.
      Section 5133. Banking Business, What Mat Do. — 8. After the guaranty stock shall have been fully paid into the treasury of the association, it may, for and with its stockholders, also do and transact the business now possessed and exercised by banks under the laws of this state, but may not do a general banking or trust business.
      Section 5134. Sdkplds Pond — Dividends.—9. After the expenses of management and operation, taxes and other expenses are deducted, there shall be set aside from the annual or semiannual gross profits three (3) per cent thereof for the sinking fund, which is to provide against contingent losses, and also at least two (2) per cent thereof for the surplus fund of the guaranty stock; said sinking fund may be accumulated at an amount equal to six per cent of the assets of the association, and said surplus fund may be maintained when accumulated at an amount not less than ten (10) per cent in excess of the guaranty stock as a part thereof; and dividends on stock may be declared as provided in domestic building and loan associations laws: Provided, That the said surplus fund may be considered as part of said guaranty stock and share in dividends as paid-up stock.
      [Acts of Indiana (1931), chapter 153.]
      Sec. 7. Title op Act — Amendment. That the title of the above entitled act be amended to read as follows: An act concerning guaranty loan and savings associations.


text:
    353 Lexington Avenue Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65089.
    Promulgated February 20, 1933.

      Wilton H. Wallace, Esg., for the petitioner.

      J. A. Adams, Esg., for the respondent.
   OPINION.

Aeundell:

Upon audit of the consolidated return filed by petitioner and its subsidary, Lexington Improvement and Development Corporation, for 1929, the respondent disallowed a deduction for net loss claimed to have been sustained in 1928, disallowed a portion of a deduction for depreciation, and allowed a deduction, which apparently had not been claimed by petitioner in the return filed, for exhaustion of leasehold. These adjustments resulted in a deficiency of $327.49.

From the stipulated facts, which we adopt by reference as our findings of fact, it appears that in 1924 petitioner’s subsidiary leased certain ground in New York City and erected thereon a building which was completed in January, 1926, and which has since been operated as an apartment hotel. The cost of procuring the lease was $27,000 and the cost of constructing the building was $469,630.73.

The original term of the lease is for the period from November 1, 1924, to November 1, 1945, a period of 21 years, and provides that upon the expiration of that term it will be renewed, if the lessee notifies the lessor of his desire to renew, for a further period of 21 years, and that upon the expiration of this second period the lessee may renew for two further periods of 21 years each. The possible total life of the lease, in the event the renewal privileges are exercised, is 84 years. The rentals for the renewal periods, in the event the parties do not agree upon the amount, are to be fixed at an amount equal to 5y2 per cent of the “ appraised value of the land without building.”

For the year 1929 the respondent allowed a depreciation deduction for the building computed at the rate of 8 per cent of the cost thereof, and a deduction for exhaustion of the lease in an amount representing one eighty-fourth of the cost. Similar deductions allowed for the year 1928 resulted in the elimination of a net loss for that year, which was carried over as a deduction in computing net income for 1929. Petitioner now claims that deductions should be allowed for depreciation of the building and exhaustion of the leasehold at the rate of one twenty-first of the cost of each.

Petitioner’s principal reliance is on the case of Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381, in which it was held that where the original term of a lease had 19 years to run from March 1, 1913, with an option to renew for 21 years at a renewal to be based on an appraisal of the property, the lessee taxpayer was entitled to exhaust the March 1, 1913, value of the lease over the remaining life of the original term of the lease. That decision is premised upon the statutory provision that exhaustion deductions are allowable in respect of “ property used in the trade or business,” and the fact that in that case “the property being used in the business (the leasehold) will be exhausted in nineteen years.” In so holding the court did not disregard the existence of the option to renew, but proceeded on the theory that the option was not property then being used in the business, and that in the event of its exercise new property would be created which might then be the subject of exhaustion. Counsel for respondent attempts to distinguish the present case from the Bonwit Teller decision on the ground that the court had before it a question of exhausting only the March 1, 1913, value of the unexpired term of the original lease, whereas in this case the investment by the lessee in the building and the length of its useful life makes it evident that the lessee intended to renew, and consequently exhaustion should be spread over the period that the lessee is entitled to enjoy the use of the property. We think that this is not a valid distinction. A reading of the court’s opinion discloses that the renewal privilege was taken into consideration and it was held that the result would be the same whether or not the option entered into the value of the lease. The court said:

Such an option might readily enhance the value of the lease, but it could hardly be supposed to change the period during which the lease would become exhausted.

We should not lose sight of the fact that in both cases rentals were to be adjusted upon exercise of the option to renew, and it is far from certain that a rental based on land values a score of years in the future would make a renewal attractive to the lessee. In our opinion the Bowwti Teller case is controlling here and deductions for exhaustion of the lease should be confined to its original term.

Respondent points out that a situation might arise where the original term of a lease was a comparatively short period, say a year or two, with an option to renew for 21 years, and in such case a write-off ■over the original term would not be justified. Under such circumstances it seems to us very doubtful whether an exhaustion allowance ■confined to the original term would meet the statutory requirement ■of reasonableness. However, that is a question to be decided when ■the occasion arises.

As to the building erected by the lessee, we are of the opinion that the respondent’s allowance must be sustained. The respondent has found that the building had a useful life of 33y3 years and upon that finding has computed depreciation at the rate of 3 per cent a year. Petitioner did not dispute this and has offered no evidence to show that the respondent’s determination in this respect is erroneous. Under these circumstances we are compelled to accept the determination as correct. There is no requirement in the statute that the cost of a leasehold and the cost of improvements placed by the lessee on the leased premises shall be exhaustible over the same period, even though it might simplify accounting if the useful life of the lease and the improvements were coextensive. Cf. Eimer & Amend, 2 B. T. A. 603. In the instant case the adjusted rental provided for, should the option of renewal be exercised and the lease extended, is by the terms of the lease to be based solely on a percentage of the value of the land without reference to the improvements. We believe that here the land and the improvements must be regarded as separate pieces of property and deductions allowed accordingly. If it so happens that the lessee does not renew the lease and finds that a portion of its capital investment is not fully exhausted through deductions allowed for depreciation, it will undoubtedly be entitled to a loss deduction to make up the difference.

According to the deficiency notice the net loss claimed in 1928 and disallowed by respondent as a deduction for 1929 arises from adjustments in claimed deductions for exhaustion and depreciation similar to those for 1929. The same deductions should be allowed for 1928 as we hold herein are allowable for 1929. We are unable to tell at this time what the effect will be on the alleged net loss and this may be settled under the recomputation that will need to be made.

Eeviewed by the Board.

Decision will be entered, under Bule 50.


text:
    Jerome R. George, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45240.
    Promulgated February 20, 1933.

      Howe P. Cochran, Esq., for the petitioner.

      B. W. Wilson, Esq., and S. B. Anderson, Esq., for the respondent.
   OPINION.

Black:

The respondent determined a deficiency of $50,686.78 against the petitioner for the year 1924. Petitioner alleges that the determination of the Commissioner is based upon the following errors:

(a) Use of an incorrect net income.
(b) Failure to allow as a deduction in computing the net income for 1924 ihe net loss sustained by the taxpayer during the year 1923.
(c) Erred in adding to income for 1924 the sum of $151,038.98.

No evidence was offered as to any net loss for 1923 and petitioner says nothing about it in his brief and, under these circumstances, that particular assignment of error will be considered as abandoned.

Petitioner is a mechanical engineer and resides in Marion, Massachusetts. During the taxable year and for a number of years previous thereto he was employed by the Morgan Construction Company, of Worcester, Massachusetts. This company was engaged in the construction of complete rolling mill units throughout the world. It was the leader in that field of construction.

Petitioner held only one share of stock in the company, which was for qualification purposes, but he was a valued employee as chief engineer and served as vice president and director for several years. He received for his services a salary of $25,000 yearly and in addition thereto commissions and bonuses measured by the profits of the company, which additional compensation averaged between $100,000 and $200,000 per year for a good many years.

These bonuses and commissions were voted to him by the stockholders of the company in the early part of the year in which they were to be earned, to be paid from the profits of the current year. The meeting authorizing the payment for 1923 was held February 27,1923, and that for 1924 on February 19, 1924.

The minutes of the 1923 meeting were as follows:

Voted: To pay as additional compensation to Jerome R. George for title year 1923 an amount equal to 12%% of the net profits of the company for the year 1923, after providing for accrued dividends on preferred stock for the year 1923, and before providing for Federal Income Taxes for the year 1923.
Voted: To pay as additional compensation to Jerome R. George, E. H. Oar-roll, Paul B. Morgan, J. W. Sheperdson, O. O. Smith, W. A. Winn, and R. L. Mason, an amount equal to 50% of the net profits of the company for the year 1923, after deducting Mr. George’s additional compensation as covered by next previous vote, dividends accrued during the year on outstanding preferred stock, the sum of $20,000 Federal Income Taxes for the year 1923 and that the proportion to be paid to each be determined by the Board of Directors.

The resolution for 1924 was to the same effect and expressed in the same language.

The Morgan Construction Company kept its books of account and made its returns on the accrual system and took deductions for the compensation including bonuses and commissions agreed to be paid petitioner for the year in which the services were rendered and in which year it was accrued. This was approved by the respondent. Owing to the size and extent of the company’s operations, it was sometimes impossible to close its accounts on the last day of the year and compute the additional compensation to which the petitioner was entitled, but it was done as soon as possible in the following year and the books were closed as of the 31st of December preceding. For the year 1923 the books were closed early in 1924, showing a credit to petitioner of $151,038.98 on account of commissions and bonus earned during 1923. For the year 1924 the books were closed early in 1925, showing a credit to petitioner of $130,647.94 on account of commissions and bonus earned during 1924.

From 1913 to 1923, both inclusive, the petitioner reported his entire earnings from the company in the year in which the services were rendered. In some of the earlier years he collected approximately all of it in the year earned. In later years, when the business of the company and his compensation increased, part of the commissions and bonus was not collected until the year following that in which earned, and in such instances interest-bearing notes were given.

In 1924 petitioner found out that other employees of the Morgan Construction .Company had been reporting their bonuses and commissions on the cash receipts and disbursements basis and therefore in the year in which they were actually received rather than in the year in which the Morgan Construction Company accrued them on its books. Petitioner, therefore, without getting. permission from the Commissioner, changed his method of reporting income for 1924 from the accrual system to the cash receipts and disbursements method. His 1924 return reported no bonus and commissions from the Morgan Construction Company because bonuses and commissions for 1923 (paid in 1924) had been reported for taxation in 1923 on the accrual system and by his change of method, bonus and commissions accrued for 1924 (paid in 1925) were not returned rendered for taxation until 1925.

The Commissioner held that petitioner had no right to change the basis without his consent. On this point, petitioner’s counsel, in his opening statement at the hearing, said: “We are perfectly willing to concede that position would be well taken in which Mr. George would this very year owe, instead of some $50,000, some $42,000, a difference of $8,000, and we think the Commissioner was correct on that. But afterwards the Commissioner struck upon a new idea which is the basis of this deficiency, tó-wit: that he would take the $150,000 commissions earned in 1923 and reported in 1923 and accrued in 1923, and tax them in 1924, and that makes this difference. Petitioner admits that by preserving the accrual basis his deficiency would be about $41,000 instead of $50,000, and this he is perfectly willing to admit.”

Petitioner’s son kept his accounts for him in a cash book and ledger in which were recorded the facts connected with his various business transactions. Some items were recorded on the cash receipts and disbursements basis and certain items were accrued, including the bonus and commissions due from the company. The ledger showed, for 1923: “ Morgan Construction Company, demand note dated December 31, 1923, for $151,038.98 at 5%; up to July 1, 1924, $75,038.98 paid on principal, $76,000 still due.” For 1924 the ledger showed: “Morgan. Construction Company bonus and commission 1924, schedule oí payments in 1925. Due December 31, 1924, $130,647.94, interest for 73 days at 5% up to March 14, $1,306.48, principal paid on March 14th, $15,000.”

There was no written, contract between petitioner and the company, but it was originally agreed that the additional compensation was to be paid during the year when accrued and at the same time dividends were paid stockholders. As the business of the company increased and it had use for its cash, it became the custom of petitioner to allow his additional compensation to remain with the company until the following year and draw it as he needed it, but it was understood that the entire sum was due December 31 of each year and he had the right to draw down his earnings at that time or before. When payments were deferred, interest was collected from December 31 of the year when payments were due.

Petitioner’s 1923 tax return showed a tax of only $118.06, which resulted from deductions of losses of $169,768 incurred in other enterprises entirely disconnected with Morgan Construction Company.

Upon audit of this return it was approved, except that it was held by the respondent that there had been an overassessment of $88.77, which was refunded with interest of $13.60. After conferences with petitioner’s representative relative to taxes for 1924, 1925, and 1926, respondent, on February 18, 1929, ruled that the petitioner’s bonus and commissions earned in 1923 should be considered as income for 1923, and that likewise the bonus and commissions earned in 1924 should be considered as income for 1924 and not 1925 as reported. On this basis a deficiency for 1924 of $41,918.62 was determined. By his deficiency notice of May 23, 1929, the respondent reversed his previous finding and determined a deficiency of $50,686.78 for 1924 instead of $41,918.62 previously determined. This was accomplished by holding that the petitioner was on the cash receipts and disbursements basis and including petitioner’s bonus and commissions earned in 1923, but collected in 1924, in income for 1924, and including bonus and commissions earned in 1924 in income for 1925, the year in which collected.

As will be seen from the foregoing statement, the principal question involved is whether the bonuses and commissions earned by petitioner are properly taxable in the years in which they were earned and accrued as income on petitioner’s books or are taxable in the year when actually collected.

Under the facts as detailed in our findings, we think the bonus and commissions earned in 1923 were properly reported by petitioner on the accrual basis and are taxable in that year and that the action of respondent in transferring those items from 1923 to 1924 and basing the deficiency thereon is error.

The facts of the instant case are very similar in their import to the facts which we had before ns in the cases of Max Schott, 5 B. T. A. 79, and Theodore Stanfield, 8 B. T. A. 787.

In the Schott case the taxpayer was in the employ of a corporation and received the larger part of his compensation through bonuses and commissions called tantiemes. The taxpayer in that case was entitled to receive a certain percentage of the net profits for each fiscal year. The company kept its accounts on the accrual system and credited the bonus and commissions of the taxpayer during the year in which they were earned and took deductions accordingly. In some years the computations and entries were not made until after the close of the fiscal year when the books were closed, but, when made, were entered as of the last day of the year and interest paid thereon until collected. Taxpayer kept an open account with the company, in which was recorded his various transactions with the company (some on the accrual basis and sojae on the cash receipts and disbursements basis), such as tantiemes earned, dividends on stock, and various purchases and sales of securities. Upon his balances the company allowed and paid interest. The taxpayer also kept a book of accounts of his own in which were reflected his transactions with the company and whatever income was carried to his credit on the company’s books was entered as income on his books when accrued, irrespective of the time when the amounts were paid to or withdrawn by him. The Board said:

Passing without discussion the contention that because the tantieme recipients were in control of the Company there was constructive receipt by them of these tantiemes, we find that this taxpayer kept an account book in which he recorded his various transactions. Included in this are accounts and notes receivable and payable, upon which interest is annually accrued, whether or not paid or payable. Taxes were entered in the year in which payable. Sums credited to his account by his employer were entered as of the date credited, whether paid or not. While there are departures from a strict accrual system of accounting, it is manifest that the primary purpose of the taxpayer’s accounts is to reflect income and expense upon an accrual basis, and the returns of the taxpayer were uniformly made upon that basis. In such circumstances it is immaterial that some items may not have been treated upon a strictly accrual basis. Appeal of Bartles-Scott Oil Co., 2 B. T. A. 16; Appeal of John F. Cook, 4 B. T. A. 916. In such cases the net income will be adjusted to correctly reflect it upon the accrual basis.
It seems evident that these tantiemes were accruable for the year in which earned. The amount which each person was to receive was a mere matter of computation, being a percentage of the profits for the year. When such amounts are definitely ascertainable as of the close of the year, the fact that the computation and entry on the books is made after the close of the year is immaterial. In such a case the amounts are properly to be accrued as an expense by the corporation for the year in which the services were rendered. The Commissioner has so treated the amounts so far as the corporation is concerned. Upon the same facts, the amounts are to be accrued as income for the same year by a taxpayer upon an accrual basis. The deficiencies so far as they arise from the errors alleged in the petition, are disallowed.

The case of Theodore Stanfield, sufra, is a companion case to the Schott case and involved the same question and the same employer. The Board said in part:

It can scarcely be contended that the tantiemes did not accrue to the petitioners in the years in which the services, for which they were payment, were rendered. While the exact amount was not known at the close of each year, all facts necessary to a computation were ascertainable at that time. That the computation and entry are subsequently made is immaterial. See United States v. Anderson, 269 U. S. 422; Max Schott, 5 B. T. A. 79.

Discussing the question as to when a taxpayer is properly held to be on an accrual basis, the Supreme Court, in Aluminum Casting Co. v. Routzahn, 282 U. S. 92, said:

Petitioner, relying on the declarations in its returns that they were made on the basis of actual receipts and disbursements, contends that for that reason they must be deemed made under Section 12(a) and not under Section 13(d). But whether a return is made on the accrual basis, or on that of actual receipts and disbursements, is not determined by the label which the taxpayer chooses to place upon it. The use of inventories and the inclusion in the returns of accrual items of receipts and disbursements appearing on petitioner's books, indicate the general and controlling character of the account. Niles Bement Pond Co. v. United States, 281 U. S. 357, 360, 50 S. Ct. 251, 74 L. Ed. 901; U. S. v. Anderson, supra, 269 U. S., pages 442, 443, 46 S. Ct. 131; 70 L. Ed. 347 and support the finding of the trial court that books and returns were on the accrual basis. [Italics ours.]

' Under the authority of these cases we are convinced that the petitioner was keeping his accounts and made his returns upon an accrual system for 1913 to 1923, inclusive, and that such system fairly reflected his income. This being true, petitioner had no right to change in 1924 from the accrual basis of reporting his income to the cash receipts and disbuz’sements basis without securing the permission of the Commissioner to make such change. Art. 23 (3), Regulations 65 (Revenue Act of 1924); Clendening Co., 1 B. T. A. 622; American Conservation Service Corp., 24 B. T. A. 183. In the latter case we said:

The Commissioner found the petitioner had kept its books and made its returns in years prior to 1922 on the cash receipts and disbursements basis * * * and as there was never any consent shown to have been given by the Commissioner for the petitioner to change its method of accounting and making its tax returns, the Commissioner’s determination is approved.

From the foregoing it logically follows that as the petitioner did not obtain the permission of the respondent to change his system of making his return for 1924, petitioner’s return for that year, in which he omitted the bonus and commissions earned during that year, was erroneous. The return should have been made on the same basis as for previous years.

The deficiency should be computed by including in petitioner’s income for 1924 the sum of $180,647.94, bonuses and commissions earned and accrued in that year, instead of $151,038.98, earned and accrued in 1923, and erroneously included in 1924 by respondent.

Decision will be entered under Bule 50.