author: GReen:

text:
    Adolph Hirsch & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3230.
    Promulgated July 23, 1927.
    Up on the evidence held that the petitioner and the Brazilian Rubber Plantation & Development Co. were affiliated during the calendar year 1920.

      Meyer Bernstein, Esq., for the petitioner.

      J. Harry Byrne, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of its income and profits tax for the calendar year 1920, for which year the Commissioner determined a deficiency of $12,386.24. The petitioner alleges that the Commissioner erred in refusing to affiliate it with the Brazilian Rubber Plantation & Development Co.
    FINDINGS OF FACT.
    Adolph Hirsch & Co., Inc., hereinafter called the Hirsch Company, is a domestic corporation, organized August 18, 1919, and existing under and by virtue of the laws of the State of New York. The Brazilian Rubber Plantation & Development Co., hereinafter called the Brazilian Company, is a domestic corporation organized July 6, 1906, and existing under and by virtue of the laws of the State of New York. The principal place of business of both of these corporations is 63 Park Row, City of New York, State of New York.
    Since 1888, Adolph Hirsch, a former American Vice-Consul to Brazil, and his brother, I. Henry Hirsch, have been engaged in the business of importing diamonds, rubber, wax, cocoa, hides, skins, etc., and have had numerous branches and correspondents, one of the main South American branches being located at Bahia, Brazil. Until 1919, the date of incorporation of the petitioner company, this business was conducted as a partnership, known as Adolph Hirsch & Co., in which Adolph Hirsch owned a 60 per cent interest and his brother, I. Henry Hirsch, 40 per cent. At the time of incorporation, Adolph Hirsch transferred 10 per cent and I. Henry Hirsch, 5 per cent, of their holdings to their nephew, Arthur A. Glass, and these three continued to be the only stockholders in the corporation of Adolph Hirsch & Co. Capital stock of the Adolph Hirsch & Co. in the amount of $400,000 was issued to Adolph Hirsch for the good will of the partnership. All the assets- and liabilities of the partnership were transferred to the corporation, which continued to conduct the business in the same manner as it had been carried on by the partnership. Adolph Hirsch & Co., both as a partnership and a corporation, was represented in Brazil by a Brazilian Company called The Companhia Brazileiro Exportadivia. The Brazilian Company, during 1920, was engaged in working plantations in the State of Pianhy, Brazil, the outlet or port of shipment of the rubber and other products grown by the company being Bahia, Brazil.
    A plantation was acquired in 1905, consisting of 27' square miles of land suitable for a rubber plantation, to which was added an additional 27 square miles adjacent thereto, acquired from the State of Pianhy, Brazil. Title to the land was taken in the name of Adolph Hirsch and the sale is still registered in his name in the Brazilian Registry. In. 1906, the Brazilian Company was formed to operate these plantations.
    The total authorized capital stock of the Hirsch Company was 20,000 shares, par value $100 each, all of which had been issued and were owned as follows:

    The stock of the Brazilian Company, dui'ing the year 1920, aggregated 4,240 shares and was owned and controlled as follows:

    The Brazilian Company never had an office of its own, never had a selling organization of any kind, never existed as a buying organization or as a commercial entity in any place whatsoever. All of its affairs were handled by the brothers, Adolph Hirsch and I. Henry Hirsch, first through the partnership of Adolph Hirsch & Co. and later by its successor, the corporation, Adolph Hirsch & Co. No l-egular set of books was kept recording the affairs of the Brazilian Company, no cash book, no ledger, no sales book. It did have a separate bank account' from September 5, 1906, to December 1913, but since then, has had no separate bank account. All activities on the plantation and elsewhere were financed and managed entirely by the Hirsch Company, through Adolph Hirsch and I. Henry Hirsch, which furnished the money for the development of this exploitation.
    The affairs of the Hirsch Company and the Brazilian Company were conducted through one office and one set of employees. Funds for the conduct of the affairs of the Brazilian Company were advanced by the Hirsch Company, either by cable transfer of money or the opening of a credit against which a draft would be made by the people in Brazil. No funds were supplied by the Brazilian Company for any of the operations or for any purpose whatsoever.
    All sales of cotton, rubber, and other merchandise produced by the Brazilian Company were made through and in the name of the Hirsch Company. In Europe, the merchandise was sold by the correspondents of the Hirsch Company. Proceeds of such sales were credited on the books of the Hirsch Company against advances made by it. No sales of merchandise were made to or through any organization other than the Hirsch Company and the agents of the Hirsch Company abroad. All of the affairs of the Brazilian Company were conducted by Adolph Hirsch and I. Henry Hirsch as a department of the Hirsch Company business in the same manner as were conducted the various other departments of their business.
    No regular meetings of the stockholders and directors of the Brazilian Company were held.
    At the time of the incorporation of the Brazilian Company, Adolph Hirsch and I. Henry Hirsch, in an attempt to befriend some of their very close friends, permitted them to subscribe to a portion of the stock of the Brazilian Company and the ownership of this stock was made a “ family affair among friends.” No subscriptions of .stock were solicited from the general public. These stock owners were divided into three groups, one group of which comprised all intimate friends of Adolph Hirsch, another group consisted of intimate friends of I. Henry Hirsch, and the third group consisted of their attorneys and members of their attorneys’ family, who were intimate friends of the Kirsches.
    The largest block of the minority stock was owned by Harry Bloomberg and his family. Mr. Bloomberg was the personal attorney of the Hirsch brothers and had been intimately associated with them for 35 years. It was he who acted as attorney for the incorporation of the Brazilian Company and he has been a stockholder and director since its incorporation. Bloomberg testified “ that we went into it with our eyes open with the hope of realizing something and if we did not, we know you did your utmost to make it productive and it is with no fault of yours if it is a failure.” The minority stockholders were all entirely satisfied with the manner in which the Brazilian Company was operated and never, at any time, interfered with the policy of the Hirsch brothers.

      There was complete harmony between the stockholders and the officers. The stockholders had absolute confidence in the integrity and ability of the officers and actually left the management and operation entirely in their hands. Adolph Hirsch and I. Henry Hirsch had complete control of the management and operation of both corporations.
    The minority stockholders made their investment in the Brazilian Company, realizing that it was a speculation and permitted Adolph Hirsch and I. Henry Hirsch to manage the company.
    The business of the Hirsch Company and the Brazilian Company was managed as a single business entity, using the same personnel and the same office.
    The Commissioner refused to permit the two corporations to file a consolidated return for the calendar year 1920, on the ground that they were not affiliated corporations, within the provisions of section 240 (b) of the Bevenue Act of 1918, and asserted a deficiency of $12,386.24.
   OPINION.

GReen:

The question here is whether the petitioner should be affiliated with the Brazilian Bubber Plantation & Development Co. Affiliation, if it exists, must be based on ownership or control of substantially all the stock by the same interests.

Section 240 (b) of the Bevenue Act of 1918 is as follows:

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

Adolph Hirsch and I. Henry Hirsch, brothers, owned 94.85 per cent of the stock of the Hirsch Company and they also owned 55.63 per cent of the stock in the Brazilian Company. The Brazilian Company was formed in 1906 to develop a large tract of land which Adolph Hirsch had acquired in Brazil, and the sole activity of the corporation was in this development. After its organization all advances were made directly by the Hirsch Company. No funds were supplied by the Brazilian Company for any of the operations or for any purpose whatsoever. It maintained no separate office and all of its affairs were conducted by Adolph Hirsch and I. Henry Hirsch as a department of- the Hirsch Company. The minority interests were in the hands of friends and associates of Adolph and I. Henry Hirsch, who had been induced to go into the venture on account of its speculative nature. The largest group of minority stockholders was composed of Bloomberg and his imme-díate family. Bloomberg bad been a close friend and business associate of Adolph Hirsch and I. Henry Hirsch for some thirty-five years. • He represented Adolph Hirsch & Cu. as attorney while it was a partnership and continued to act in this capacity for the successor corporation. He was also the attorney who organized the Brazilian Company and from the time of its organization served as a director and attorney. He testified that he was entirely satisfied to trust the management of the Brazilian Company to the judgment of Adolph and I. Henry Hirsch.

The intercompany transactions show that there was the closest relationship existing between the two organizations, the Brazilian Company being operated as a department of the Hirsch Company. It is a clear case of commercial and economic unity.

In Midland Refining Co., 2 B. T. A. 292, it was stated:

A careful examination of the stockholdings and the relationships existing between the various holders shows that substantially all of the slock is owned or controlled by the same individuals. It seems to follow, naturally, if a group of individuals owns or controls substantially all of the stock of both corporations, and if such ownership or control is by all exercised for one purpose, namely, the joint success of the corporations, that these individuals meet the requirements of the words “ the same interests.”

The stockholdings and conduct of the two corporations involved in this proceeding meet the above requirements.

We believe that the two corporations were affiliated.

Judgment for the petitioner upon the issue raised on 15 days' notice, under Rule 50.

Considered by AkuNdell and Sternhagen.


source: Caselaw Access Project

author: Milliken :

license: Public Domain

text:
    R. M. Rogers, Petitioner, v. Commissioner of Internal Revenue, Respondent. Katie Rogers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 10842, 10843.
    Promulgated July 25, 1927.

      E. D. Gatlin, Esq., for the petitioners.

      Shelby S. Faulkner, Esq., for the respondent.
   Milliken :

These proceedings have been consolidated by agreement and involve the following deficiencies in income tax for the year 1920:

R. M. Rogers_$1,180.22
Katie Rogers- 971.79

These deficiencies arise from the fact that the respondent has included in the gross income of the petitioners, at their face value, certain promissory notes given in part consideration for the granting of an oil and gas lease. The sole question presented is the value of these notes at the time they were received by petitioners.

FINDINGS OP PACT.

The petitioners, R. M. Rogers and Katie Rogers, were, at all times herein mentioned, husband and wife, and the owners in community on an undivided one-third interest in the parcel of land hereinafter described, situated in Stephens County, Texas. On March 30, 1920, the petitioner, R. M. Rogers, together with his coowners, executed and delivered to C. E. Cooper and R. H. Henderson, an oil and gas lease, the material parts of which read:

Oil and Gas Lease.

Ageeement, Made and entered into this 30th day of March, A. D. 1920, by and between N. N. Rosenquest, J. R. Coody and R. M. Rogers of' Stephens County, Texas, hereinafter called Lessors, and C. E. Cooper and R. II. Henderson, of Stephens County, Texas, hereinafter called Lessee:
Witnesseth: That the said lessors, for and in consideration of Ten & no/100 ($10.00) Dollars cash in hand paid, the receipt of which is hereby acknowledged and other good and valuable considerations, as hereinafter set out and of the covenants and agreements hereinafter contained on the part of the lessees to be paid, kept and performed, have granted, demised, leased and let, and by these presents do grant, lease and lot unto the said lessees for the sole and only purpose of mining and operating for oil and gas, and of laying pipe lines and of building tanks, power, stations and structures thereon to produce, save and take care of said products all that certain tract of land situated in the county of Stephens, State of Texas, described as follows, to-wit:
Being 40 acres of land, and being the W one-half of the North one-half of the N. E. Quarter of Section No. 3, Lunatic Asylum land, in Stephens County, Texas, and being a part of the same land patented to B. B. Meadors on April 9, 3878.
It is agreed that this lease shall remain in force for a term of two years from this date, and as long thereafter as oil or gas or either of them is produced from said land by the lessees in paying quantities.
In consideration of the premises, the said lessees covenant and agree:
First: To deliver to thp credit of lessors free of cost in the pipe line to which said wells may be connected, the equal one-eiglith part of all oil produced and s^ved from the leased premises.
Second: To pay the lessors the equal one-eighth part of the proceeds of all gas from each well where only gas is found, or at the option of lessors, to deliver same into pipe lines to their credit, free of cost, while the same is being used o£E the premises.
Third: To pay lessors for gas produced from any oil well and used off the premises, at the rate of the equal one-eighth part of the proceeds from same for the time during which such gas shall be used, or at the option of lessors, into pipe lines to their credit, free of cost.
Fourth: To deliver to credit of lessors, free of cost, into the pipe line to which said wells may he connected, in addition to the one-eighth part of the oil produced, as provided for in paragraph one, the further amount of all the first seven sixteenths (luths) of all oil produced from said land; provided, however, that said seven sixteenths (fiths) shall be paid to lessors only until the lessors have been paid 20,000 barrels of oil; such oil to be delivered to the lessors in the pipe line to which said wells may be connected.

In addition to the consideration recited in the lease, Cooper and Henderson, on March 30, 1920, executed and delivered to petitioner R. M. Rogers, N. N. Rosenquest and J. R. Coody, their four unsecured promissory notes, each for the sum of $10,000, with interest at the rate of 8 per cent per annum. The notes matured as follows: the first note, six months after date; the second, January 2, 1921; the third, April 1, 1921, and the fourth, July 1, 1921. On April 7, 1920, Cooper and Henderson assigned the oil lease to the C. H. R. C. Oil Co., a corporation organized under the laws of Arizona. The C. H. R. C. Oil Co., as a part of the consideration for the assignment, assumed and agreed to pay the notes above mentioned. The first note was paid at maturity, the second and third notes shortly after maturity, but at a time not shown by the evidence. The fourth note was paid after maturity, in oil.

In the summer of 1919, C. E. Cooper and R. H. Henderson, migrated from California to Stephens County, Texas. At the time of their arrival in Stephens County, they possessed about $4 between them. They at once set about securing oil leases, nearly all of which were similar in terms to the one herein involved. No cash was paid for any lease but in nearly every lease there was given, as a bonus, the unsecured notes of Cooper and Henderson and also a large amount of the first run of oil. Practically all of the leases were given on undeveloped land. The value of all such notes was speculative. At all times, during the year 1920, the liabilities of Cooper and Henderson were far in excess of their assets.

The C. II. R. C. Oil Co. was organized with a paid-in capital of $25,000. To it were assigned many of the leases secured by Cooper and Henderson and in all cases it assumed their liabilities. At all times the liabilities of the corporation were far in excess of its assets. It operated principally on borrowed money.

There was paid to the petitioner and his wife, in 1920, in satisfaction of their interest in the first note, one-third of $10,400. Of this amount, one-half was attributable to R. M. Rogers, and one-half to Katie Rogers. The remaining three notes aggregating $30,000 had no fair market price or value when received in 1920.

Judgment will be entered on W days' notice, under Bule 50.

Considered by Marquette and Phillips.


author: Love:

text:
    Hartford Hat & Cap Co., Petitoner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 7400.

    Promulgated July 25, 1927.

    1. Jurisdiction. — The Board has not jurisdiction to redetermine tlie tax of a year for which no deficiency has been determined by the Commissioner. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.
    2. Bad debts.- — During the fiscal year ending June 30, 1919, petitioner determined to be worthless and charged oil certain debts totaling $562.45, which amount was deducted from gross income and allowed by the Commissioner. Petitioner claims that its determination of worthlessness and the charge-off in the fiscal year 1919 was erroneous and therefore the collection in the succeeding year did not result in the receipt of income. Held, that the evidence is insufficient to show that the petitioner erred in determining the debts to be worthless and charging them off in the fiscal year ending June 30, 1919.
    3. Officers’ salaries. — Evidence held insufficient to show that amount of alleged additional salaries was paid or incurred during the taxable year.

      Joseph Getz, C. P. A., for the petitioner.

      Joseph E. Moyer, Esq., for the respondent.
    This proceeding is to redetermine deficiencies in income and profits tax for the fiscal years ended June 30, 1920, and 1921, amounting, respectively, to $884.84 and $406.48. The petition also refers to fiscal year ended June 30, 1922, although no deficiency was determined for that year.
    The petitioner alleges errors in disallowing expenses for entertaining customers; in including in income for the fiscal year ended J une 30,1920, accounts collected in this year which had been charged off .as worthless in a prior year; and in disallowing additional amounts claimed as officers’ salaries in the years ended June 30, 1920 and 1921.
    FINDINGS OF FACT.
    The petitioner is a Connecticut corporation with its principal office and place of business at Hartford, and is engaged in manufacturing cloth hats and caps.
    The Commissioner disallowed sums reported by petitioner as donations, aggregating $87.61 in 1920, and $227.98 in 1921. These amounts included expenditures for cigars and cigarettes presented to customers and buyers, aggregating $77.50 in the fiscal year ended June 30, 1920, and $62.98 in the year ended June 30, 1921. These presents fostered a good feeling which was helpful to petitioner’s salesmen when soliciting orders.

      In the year ended June 30, 1919, the petitioner charged oil the following debts which it then believed to be worthless, and the amounts were deducted in petitioner’s tax return:
    Norman G. Eddy__ $150. 32
    Ereidman Bros_ 124. 50
    E. Parant & Oo_ 230. 50
    Stratton Bros- 48.13
    Total_ 502. 45
    The deduction was allowed by the Commissioner. These debts were collected during the following fiscal year and were then reinstated on petitioner’s books. The Commissioner included them in income for the year in which they were collected.
    The officers of the petitioner were Ruby Meister, president and treasurer, and Joseph Jainchill, secretary. These two and H. Sacks owned all of the capital stock and constituted the board of directors. Meister also served as a salesman and buyer, collected accounts and attended to the financial affairs. Jainchill was foreman and was in general charge of the shop. Sacks was assistant foreman and worked at cutting and sewing and making samples.
    During the years ending June 30, 1919, 1920, and 1921, each of the three drew $35 a week as salary. The petitioner alleges that the agreed salary of each of them in the two years here in question was $70 a week, and it claims the right to deduct salaries at this rate. The Commissioner has disallowed the additional $35 per week.
    In the early part of 1920 the three directors had informal conversations among themselves concerning larger salaries. The minutes of a meeting of the board of directors held April 27, 1920, contain the following:
    It was also decided to raise the salaries of the Directors.
    On February 15, 1922, the directors adopted the following:
    A motion was made, seconded and" passed that the officers’ salaries be reduced $10.00 each week on account of bad business, etc.
    During the year ended June 30, 1922, the officers drew $60 per week. The additional amounts claimed to have been authorized for the years ended June 30, 1920, and 1921, were never accrued on petitioner’s books and were never drawn by the officers, except that some time later a settlement was made with Jainchill of any claim he might have for back salary. This settlement was made by petitioner’s continuing to pay to him, during a period of disability lasting about 15 weeks, the salary of $60 per week that he had theretofore been receiving. Jainchill afterwards left the petitioner’s employ and Meister bought his stock.
   OPINION.

Love:

There being no deficiency determined for the year ended June 30,1922, we have no jurisdiction to redetermine the petitioner’s tax liability for that year. Section 274 (g), Revenue Act of 1926; Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The amounts spent for cigars and cigarettes presented to customers and buyers were, in the circumstances of this case, ordinary and necessary business expenses and deductible from gross income.

The petitioner’s position with respect to the bad debts collected in the year ended June 30, 1920, is that they were not in fact ascertained to be worthless when charged off in the previous year; therefore, the income for such previous year was erroneously reduced by such deduction.

The petitioner determined the debts to be worthless and charged off the same. The evidence here presented is not convincing that he committed error at that time.

On the contrary, the testimony shows the debts were ascertained to be worthless when charged off. Ruby Meister, the president, testified as follows:

Q. Did you on June 30, 1919, absolutely believe that the accounts of Norman G. Eddy, Ereidman Bros., E. Parant & Company, and Stratton Bros., were uncollectible?
A. Yes, sir.
Q. Did you expect to collect any portion of these accounts?
A. No, I didn’t.

The accountant in charge of the books testified:

Q. What accounts were written off?
A. The bad accounts closed off were Danbury Hat Co., Norman Eddy, Freidman Bros., E. Parant, R. H. Stackel and Stratton Bros.
Q. Did you make the entry?
A. Yes.
Q. Who told you to make that entry?
A. I kept the list of accounts, went through the accounts with Mr. Meister; he informed me that these were bad accounts, stating that they were difficult to collect, as a matter of fact they were in the hands of an attorney, referred back to us as uncollectible, naturally charged off as no good and uncollectible.

The Commissioner’s action in adding the amounts to income in the year ended June 30, 1920, is approved.

The additional amounts of salaries were not paid within the years for which they are claimed, and never have been paid. The question is whether a liability for them was incurred within the year. If not, they can not be allowed. Appeal of Randall Brothers, Inc., 4 B. T. A. 291; Sol Frankel, Inc., 3 B. T. A. 494; American Central Fruit Auction Co., 3 B. T. A. 199. They were never accrued on petitioner’s books. This, it asserts, was a mistake of the bookkeeper. However, the other testimony relating to their authorization was so vague and conflicting that we are unable to find that an obligation arose to pay them. Such obligation can not be found in the bare statement contained in the minutes of the directors’ meeting that it was “ decided to raise the salaries of the directors.” The president testified that at the informal meetings the other officers complained that they cquld not live on $35 a week and wanted larger salaries for this reason, and then he testified that the additional amounts were not drawn because they wished to let the money accumulate in the treasury so that the company would have funds with which to buy a building of its own. These statements, to our minds, can not be reconciled.

Judgment wül te entered on 15 days’ notice, under Rule 50.

Considered by Teussell and Littleton..


author: Ceben :

text:
    Alger Melton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5699.
    Promulgated July 26, 1927.
    1. Paetneeship or Joint Venture.' — Upon the evidence, held, that respondent erred in treating Ed Sheegog & Co., as a partnership rather than as a joint venture. The petitioner, being one of the joint adventurers rather than a partner, is therefore taxable on actual receipts rather than on an undistributed share of prolits.
    2. Dividends. — Upon the evidence, held that petitioner was not a stockholder in the Msher-Whaley Oil 'Co.
    3. Conflict of Laws. — Whether a partnership exists between certain individuals who agree in one State to buy and operate an oil lease in another State is governed by the laws of the State where the agreement is made rather than the State where the agreement is to be carried out.

      Alger Melton, Esq., and Hubert L. Bolen, Esq., for the petitioner.

      M. E. McDowell, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of his income-tax liability for the calendar year 1919 for which the Commissioner has determined a deficiency of $4,445.88. The errors assigned are that the respondent erred in including in the petitioner’s income $23,930 as representing the petitioner’s one-fourth share of the alleged distributive income of the so-called partnership of Ed Sheegog & Co. and $372 as representing a cash dividend from the Fisher-Whaley Oil Co. Of the total amount alleged to have been erroneously included in income, the amount of $23,746.82 was arrived at by the Commissioner on the theory that Ed Sheegog & Co. was a partner in three other so-called partnerships, and that Ed Sheegog & Co.’s distributive share in the income of each of such concerns was:
    Turner & Slieegog_$64, Oil. 14
    T. 15. Noble & Co_ 27,428. 98
    J. A. Fisher & Co_ 3, 547.17
    Total_ 94, 987. 29
    Petitioner’s one-fourth interest. 23, 746.82
    FINDINGS OF FACT.
    The petitioner is a practicing attorney residing at Chickasha, Okla. Among the petitioner’s friends and business associates in the city were Messrs. Sheegog, Erwin, and Cralle, engaged in the oil, land, and furniture businesses, respectively. During July, 1917, Sheegog and Erwin went to Texas and purchased for $2,400 an oil and gas lease on 160 acres of land in Wichita County, known as the Beach lease. Upon their return to Chickasha they offered to sell one-half of their respective interests to the petitioner and Cralle at cost. The offer was accepted by both the petitioner and Cralle and the sale made.
    It ivas then verbally agreed between the four owners of the Beach lease that they would contribute in equal shares an amount of money sufficient to enable Sheegog to drill a well on the lease to test the shallow sand. None of the" four was to invest or to be called on to invest any more money in the enterprise than was necessary to drill the first well. It was further agreed that if Sheegog developed a producing well he should proceed to further develop the lease and each should receive one-fourth of whatever profits resulted from the operation. Sheegog was to have full charge of all operations and to keep books and accounts showing the result of such operations. Neither Melton, Erwin nor Cralle was to have anything to do with the management or operation of the lease in any way.
    Sheegog took the money, went to Texas and began operations. His first drilling operation resulted in a producing well at about 200 feet depth and he then proceeded with the drilling and “brought in ” several small producing wells.
    During 1918, Sheegog sent his personal check for $2,000 to the petitioner, advising him that that amount represented the petitioner’s share of the profits from the operation of the Beach lease up to that time. No further distributions from the Beach lease were received until the year 1928, when one check for $37 and another for $73 were received. The petitioner reported these amounts in his 1918 and 1923 returns, respectively, and paid tax thereon. No further distributions from this lease have been received by the petitioner.
    The petitioner requested Sheegog to furnish a statement of the results of the operation of the Beach lease at different times, and each time received a promise that such statement would be prepared and furnished at an early date, but no such statement or any other statement was ever furnished.
    Sheegog died in February, 1925. An investigation made by the petitioner after Sheegog’s death disclosed that no separate books or records of the operation of the Beach lease had been kept by Shee-gog, and that the Beach lease had been operated in his own name and all receipts had been handled through Sheegog’s personal bank account. Sheegog’s estate is insolvent.
    The Commissioner determined that Sheegog & Co. was a partnership. He likewise determined that the partnership of Sheegog & Co. was a member of three other partnerships, each of which had net income during the taxable year. The net income of Sheegog & Co. he determined as follows:
    Net earnings of Beacli lease- $732. 74
    Distributive share income of Turner & Sheegog_64, Oil. 14
    Distributive share income of T. B. Noble & Co_ 27, 428. 98
    Distributive share income of J. A. Fisher & Co_ 3, 547.17
    Total_ 95,720.03
    Upon the theory that Sheegog & Co. was a partnership, that the petitioner herein was a member thereof, and that its net income was $95,720.03, he determined that the petitioner’s distributive share of such partnership’s net income was one-fourth thereof, or $23,930, and accordingly added such amount to the petitioner’s- net income.
    While operating the Beach lease Sheegog, as an individual, and W. A. Turner, an individual who had drilled a number of the wells on the Beach lease, purchased an oil and gas lease on a tract of land containing 300 acres located south of the Beach lease and known as the Itoller lease. This lease was purchased under a deferred payment plan. Before the payments had been completed, Sheegog, while in Chickasha, Okla., advised the petitioner, Cralle, and Erwin that he and Turner had each purchased a one-half interest in this lease, and that it seemed that the transaction would be profitable. He further stated that it might be necessary for him to use some of the money received from the sale of the oil produced from the Beach lease to pay for his interest in this Holler lease. He advised that he would pay to each interested party a proportionate part, based on the amount of the Beach lease money used, if any, of the profit received'by him on this lease, if any.
    The petitioner, Cralle, and Erwin did not intend to or give their consent to become partners in the partnership known as Turner & Sheegog, neither did they intend for nor give their consent for Sheegog & Co. to become a partner in the partnership known as Turner & Sheegog.
    Turner, one of the partners of Turner & Sheegog, had no agreement or understanding with either the petitioner, Cralle, or Erwin relative to their becoming partners in this concern, or Sheegog & Co. becoming a partner in this concern.
    The petitioner, Cralle, and Erwin had no connection with the business transacted by the partnership of Turner &> Sheegog and were not consulted regarding the conduct of the business and were not treated as partners by either Turner or Sheegog.
    No transfer or assignment of any interest in the Roller lease was made by Sheegog to either the petitioner, Cralle, or Erwin. Turner was not advised and had no knowledge that these three individuals were to share in such profit or that they were interested in the transaction in any way.
    The petitioner was not advised by Sheegog that any profit was made on this lease and did not receive any distributions of profit from this transaction at any time. The petitioner had no knowledge of any profit being made on this transaction until advised by the Treasury Department in its so-called 30-day letter.
    The petitioner introduced in evidence a letter from Sheegog to Erwin dated August 24, 1920. This letter was written on a business letterhead of “ Turner & Sheegog, Oil Producers, Wichita Falls, Texas,” on which was printed “ W. A. Turner ” in the upper left-hand corner and “ Ed Sheegog ” in the upper right-hand corner.
    While in Chickasha on or about June 1, 1919, Sheegog advised the petitioner, Cralle, and Erwin that he had j>urchased an interest in a certain oil and gas lease and that through this purchase had become a member of an organization known as T. B. Noble & Co. He explained that he owed a balance of about $4,500 on the purchase price of this lease or leases, and that if the three individuals would advance the money to him to be used to pay this balance he would pay each of them one-fourth of the net profit received by him on this transaction. Cralle declined this offer. Erwin and the petitioner verbally agreed with Sheegog that they would furnish him with $4,500 provided he would repay that amount out of the money received by him through this transaction and then pay each one-third of the profits received by him. Sheegog agreed to this arrangement, and the $4,500 was advanced to him.

      The petitioner and Erwin did not intend to give, and did not give, their consent to become members of T. B. Noble & Co., and did not intend for, or give their consent for, Sheegog & Co. to become a member of T. B. Noble & Co. Cralle did not agree to take any interest in T. B. Noble & Co., and made no investment in this concern either directly or indirectly, and had nothing whatever to do with the transaction carried on by T. B. Noble & Co., and did not give his consent to the concern known as Sheegog & Co. becoming a member of, or acquiring any interest in, the organization known as T. B. Noble & Co.
    The petitioner and Erwin had no connection with the business transaction with T. B. Noble & Co. and were not consulted regarding the conduct of this business and were not treated as members by any of the members of this organization.
    On or about June 19,1919, the $4,500 was returned to the petitioner and Erwin by Sheegog’s personal check. During January, 1920, Sheegog sent the petitioner and Erwin each his personal check for $4,000 and advised them that this amount was their one-third of the profits from the T. B. Noble & Co. transaction. No other amount was ever received by the petitioner from Sheegog or from T. B. Noble & Co. on account of this transaction.
    The petitioner had no knowledge of, and took no part in, any of the transactions carried on by T. B. Noble & Co. He did not know who the interested parties were and was not known as one of the partners to the transaction.
    The petitioner never at any time made any agreement of any kind with, or with reference to, J. A. Fisher & Co.; never invested any money therein; never received any money or its equivalent from it; and had nothing to do with it or its operations.
    An examination of the personal records of Sheegog made after his death by Cralle disclosed that Sheegog had withdrawn from the enterprise of Ed Sheegog & Co. for his own personal use $27,598.23 in 1919, and $24,742.90 in 1920.
    The business transactions of Ed Sheegog & Co. were all conducted in the individual name of Sheegog.
    The Commissioner also increased the petitioner’s income for 1919 by $372 as representing a cash dividend from the Fisher-Whaley Oil Co. The petitioner was not one of the stockholders of the Fisher-Whaley Oil Co. and received no money or distributions of any kind from that source. The stockholders of this corporation were the same as the members of T. B. Noble & Co.
   OPINION.

Ceben :

Two issues are presented in this appeal. First, did the respondent err in including $23,930 in the petitioner’s income for 1919, which action was taken on the theory that he, Sheegog, Erwin, and Cralle had formed a partnership in 1917, each having a one-fourth interest, and that this so-called partnership was in turn a partner in three other partnerships? Second, did the respondent err in including $372 in the petitioner’s income for 1919 as a cash dividend determined by the Commissioner to have been received by the petitioner from the Fisher-Whaley Oil Co.?

We have found as a fact that the petitioner was not a stockholder of the Fisher-Whaley Oil Co. and received no money or distributions of any kind from that source. It follows that the respondent was in error in including $372 in the petitioner’s income as a cash dividend from this corporation.

In connection with the first issue, section 218 (a) of the Revenue Act of 1918 provides in part as follows:

Tliat individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year * * *.

The term “ partnership ” as used in section 218, supra, “ refers only to ordinary partnerships.” Burk-Waggoner Oil Assn. v. Hopkins, 269 U. S. 110; 46 Sup. Ct. Rep. 48; 5 Am. Fed. Tax Rep. 5663.

If the net income of Ed Sheegog & Co. for 1919 was $95,720.03 and if Ed Sheegog & Co. was in fact and in law a partnership during 1919, then in accordance with section 218 (a), supra, the petitioner should be taxed on his distributive share of such profits, regardless of the fact that he actually received no part of the $23,930 in 1919.

' The oral agreement of the petitioner, Sheegog, Erwin, and Cralle in connection with the Beach lease was made in the State of Oklahoma. It was, however, to be carried out in the State of Texas. Would the Oklahoma or Texas law govern as to the interpretation of the agreement and the determination as to whether an ordinary partnership existed between the parties? The Supreme Court of the United States in Scudder v. Union National Bank, 91 U. S. 406, at page 412 states:

Matters bearing upon the execution, the interpretation, and the validity of a contract are determined by the law of the place where the contract is made. Matters connected with its performance are regulated by the law prevailing at the place of performance. Matters respecting the remedy, such as the bringing of suits, admissibility of evidence, statutes of limitation, depend upon the law of the place where the suit is brought.

See also Gaston, Williams & Wigmore of Canada, Ltd. v. Warner, 260 U. S. 201.

This being a matter bearing upon the interpretation of the agreement the determination as to whether a partnership existed between the parties will be governed by the Oklahoma law.

Chapter 71 of the Compiled Statutes of Oklahoma provides in part as follows:

8103. "Partnership defined. — Partnership is the association of two or more persons for the purpose of carrying on business together, and dividing its profits between them.
8104. Consent necessary — information. A partnership can be formed only by the consent of all parties thereto, and no new partner can be admitted into a partnership without the consent of every existing member thereof.

8117. General partnership defined. — Every partnership that is not formed in accordance with the law concerning special partnership, and every special partnership, so far as the general partners are concerned, is a.general partnership.

In its discussion of the definition of a partnership as outlined under section 8108 supra, the Supreme Court of Oklahoma, in the case of Citizens’ Nat. Bank of Chickasha v. Mitchell, 24 Okla. 488; 103 Pac. 720, at page 726 holds as follows:

A partnership exists as a result of a voluntary contract between the parties, and never solely by operation of law. Causler v. Wharton, 62 Ala. 358; Cowles v. Garrett, 30 Ala. 341; Haycock v. Williams, 54 Ark. 384, 16 S. W. 3; Einstein v. Gourdin, 4 Woods 415, 8 Fed. Cas. No. 4, 320; 22 Am. & Eng. Ency. of Law (2d 3d.) p. 14, footnote 3. It is a relation, arising out of a contract to do certain things, and exists only where the parties intend to enter into a contract of partnership, and, unless they have estopped themselves by holding themselves out to the world as partners, their intention as derived from the contract is decisive of the question.

Tenants in common are not partners in Oklahoma. Perry v. Jones, 48 Okla. 362; 150 Pac. 168.

In Gorman v. Carlock, 179 Pac. 38, the Supreme Court of Oklahoma, in deciding that certain individuals interested in a certain oil lease were not partners,'said, inter alia:

Whether a general partnership in oil leases in the Healdton field was formed by the plaintiffs and defendants was the principal question at issue, and the general judgment for the defendants embraces the finding that such alleged partnership was never entered into between the parties. It is apparent that such finding is not clearly against the weight of the evidence, for, as heretofore stated, defendants testified that instead of there being a general partnership agreement, the understanding was that the plaintiffs and defendants were to be co-owners and equally interested only in the particular leases that all agreed to take. It is a •well recognized principle of law that a mere community of interest as owners of specific property, or of the profits from a particular adventure or business, does not necessarily constitute the co-oumers partners. (Italics ours.)

A joint adventure lias been defined as a “ special comb ation of two or more persons, where in some specific venture a profit is jointly sought without any actual partnership or corporate designation." 33 C. J. 841, citing In re Desnoyers Shoe Co., 224 Fed. 372; 140 C. C. A. 58.

In our opinion the petitioner and bis three associates in buying and operating the Beach lease, under the circumstances set out in the findings of fact, did not thereby create a partnership but operated the property only as a joint adventure. Appeal of Florida Grocery Co., 1 B. T. A. 412; Appeal of Ernest Woodruff, 4 B. T. A. 842. Either of the parties here could have sold their interest in the Beach lease without the consent of the others. They never intended to form a partnership. The petitioner, Erwin, and Cralle were all in separate businesses by themselves. The following excerpt from the petitioner’s testimony shows that similar ventures were quite common in the oil business:

At the time this Beach lease was purchased there was considerable oil development and operation around over the country and it was a very frequent thing that a man would come in and say, “X have bought a lease. Do you want to take an interest with me?” or “X have bought this or that” and one or two or three or four would say, “ Yes, I will take a little interest,” and they would. Now I never intended and it was taken on the same basis with the other three, they did not intend that this would be a joint partnership. In fact it was never operated as such and these transactions here were had on that same basis, the same intention of the parties, all taking these interests.

The respondent argues that had a third party been injured by the negligence of an employee of Ed Sheegog & Co. there could have been no question but that the petitioner as well as the three associates would have been personally liable. Such liability may also exist in a joint venture. Its existence alone does not create a partnership within the meaning of that term as used in section 218 (a) of the Revenue Act of 1918.

Since we have decided that Ed Sheegog & Co. was not a partnership it becomes unnecessary to determine whether it was a partner in the Turner, Noble, and Fisher companies.- The petitioner clearly was not a partner in any of these concerns. His relationship with respect to Turner & Sheegog and T. B. Noble & Co. was no more than that of a joint adventurer. He had no relationship whatever with J. A. Fisher & Co.

In our opinion, the respondent erred in including the $23,970 in petitioner’s income for the year 1919.

Judgment will he entered on 15 days’ notice, u/nder Rule 50.

Considered by Sternbcagen and AetjNdell.


text:
    Hanchett Bond Co., Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8703.
    Promulgated July 26, 1927.
    Evidence lield insufficient to establish the reasonableness of salaries claimed as a deduction for business expenses in 1919.

      John W. Hulse, Esq., for the petitioner.

      Thomas M. Wilkms, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of a deficiency in income and profits taxes for the year 1919 in the amount of $9,119.53. The deficiency results from the disallowance as a deduction of $4,000 salary paid L. A. Trowbridge, a director of the Municipal Securities Corporation, which was affiliated with the Hanchett Bond Co.
    FINDINGS OF FACT.
    The petitioner is an Illinois corporation engaged in the bond business. It was organized in 1910 and on May 10, 1915, the Municipal Securities Corporation was organized to take care of a special department for the handling of fractional bonds. All the stock of the Municipal Securities Corporation was owned by the Hanchett Bond Co. Both corporations had their principal place of business in Chicago, Ill. For the year 1919 the Municipal Securities Corporation filed a separate income and excess-profits-tax return. The tax was computed on the basis of a consolidated return for the Hanchett Bond Co. and the Municipal Securities Corporation. The return and accompanying schedules filed by the Municipal Securities Corporation showed as a deduction from income, compensation to officers totaling $6,200. Of this amount $5,000 was compensation to L. A. Trowbridge as director and employer. The schedule attached to the return contained the following note relative to the $5,000 item:
    Compensation made for administrative services rendered over period of past five years.
    The compensation of officers and directors was not fixed by corporate resolution, but was arranged informally. Actual payment of the salary in question was made by the Hanchett Bond Co. and the proper offsetting- entries were made on the books of the Municipal Securities Corporation, to which the Hanchett Bond Co. was indebted. Mr. Trowbridge was employed in services of value to both corporations, but no evidence was introduced to show either the value or amount of services rendered to the Municipal Securities Corporation.
    The Commissioner disallowed $4,000 of the total deduction claimed as salary for L. A. Trowbridge.
   OPINION.

GReen:

Section 234 (a) (1) of the Revenue Act of 1918 provides that, in computing the net income of the corporation, there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for services rendered. The return filed stated that the salary in question was paid as “ compensation made for administrative services rendered over period of past five years.” We were not informed whether the petitioner maintained its books of account upon the cash receipts and disbursement basis or upon the accrual basis. The additional salaries were not paid during the prior years. If the books of account were maintained upon the accrual basis for the prior years, a liability must have been incurred in those years to pay the additional salary in question, in order that the salary could be claimed and allowed as a deduction in computing net income for those years. It may be that such additional salaries paid in 1919 constitute a reasonable compensation for personal services actually rendered in that year, but we have no evidence before us concerning the salary paid, service performed, or the value or character of business done during the year 1919, and we aré, accordingly without the necessary facts to determine the issue for that year.

Judg-ment will be entered for the respondent.

Considered by Steenhagen and Aeundell.


author: Murdock:

text:
    Cora B. Beatty, Executrix, Estate of John W. Beatty, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7360.
    Promulgated July 26, 1927.
    Tlie petitioner has failed to prove that certain payments received by decedent were gifts rather than taxable income.

      W. D. Stewart, Esq.¡ for the petitioner.

      Albert S. Lisenby, Esq., for the respondent.
    Income taxes in the amount of $284.12 for the calendar year 1922 are in controversy. The Commissioner determined that $2,999.98, received by John W. Beatty during 1922, was compensation in recognition of past services and therefore taxable income, whereas the petitioner contends that the amount was a gift.
    FINDINGS OF FACT.
    The petitioner is the duly appointed, qualified and acting executrix of the Estate of John W. Beatty, who died September 29, 1924. John W. Beatty had been Director of the Department of Fine Arts of the Carnegie Institute of Pittsburgh for at least 30 years prior to July 1, 1922. The trustees and the people of Pittsburgh were very grateful to him for the splendid work he had done.
    In 1922, Beatty was about 75 years of age. His health had been failing for some years and was interfering with the execution of his official duties, one of which was to make an annual trip abroad to collect paintings for the Institute’s Annual International Exhibition. He had been unable to make the trip in the preceding year and early in 1922 it became evident to the trustees of the Institute that he was not and probably would not be able to make this trip again. At that time he had been away from his office for several months on account of ill health.
    On June 27, 1922, the trustees of the Institute adopted the following resolutions:

      Resolved, That John W. Beatty, Director of the Department of Mne Arts, is hereby retired from active service, and as a recognition of his valued and honored labors the Board hereby appoints him Director Emeritus of the Department of Fine Arts, effective July 1, 1922.

      Resolved, That the Board hereby authorizes the payment to John W. Beatty, Director Emeritus of the Department of Fine Arts, of an honorarium of $500.00 a month until further order of this Board, effective July 1, 1922.
    The Institute had no pension system for its employees and had never held out the promise of a pension to any one. Beatty had never requested retirement. He had no contract or agreement of any kind which entitled him to any compensation after July 1, 1922, other than the above resolutions. After that date he had no assignment of duties, and performed and was expected to perform no service of any kind for the Institute. He was not thereafter provided with office space.
    As director his salary had been $10,000 per year. Under the resolution of June 27, 1922, he received to the end of that year $2,999.98. He reported as income $5,000 as salary received during the first six months of the year.
    The Institute filed an information return in which it reported the payment of $7,999.98 as salary to Mr. Beatty during 1922. The Commissioner added to his reported income the $2,999.98 received by Mr. Beatty from July 1 to the end of the year 1922.
   OPINION.

Murdock:

The question to be decided in this case is whether the $2,999.98 paid to Beatty during the latter half of 1922, was taxable income, or whether it was a gift and therefore not taxable.

A gift has been defined as a valid transfer of property from one to another without consideration or compensation therefor. Noel v. Parrott, 15 Fed. (2d) 669; Gray v. Barton, 55 N. Y. 68; Curriden v. Chandler, 79 N. J. 269; Appeal of Estate of David R. Daly, 3 B. T. A. 1042. To establish a gift there must be an intention to make the gift, a change in possession in accordance therewith, and an acceptance by the donee. Farmers’ Loan & Trust Co. v. Winthrop, 207 App. Div. 356; 202 N. Y. S. 456; Appeal of Estate of David R. Daly, supra.

“Although it has been held that the motive accompanying a gift is not material, gifts usually proceed from the generosity of the giver; and, where there is any doubt as to the nature of the transaction, the absence of such motive is a pertinent circumstance for consideration.” Noel v. Parrott, supra.

In this latter case it was held that past services may be a consideration for a transfer of property from one to another and that the transfer may be by way of compensation for services previously rendered and for loss sustained-in the termination of the employment. It was also held that directors have no authority to give away corporate assets and that for them to do so would be an illegal misapplication of corporate funds and that it must be assumed that directors have not intended such a flagrant violation of their trust. See cases there cited.

It is now settled that within the meaning of the Revenue Acts, “ income may be defined as gain derived from capital, from labor, or from both combined, including profit gained from the sale or conversion of capital.” See Bowers v. Kerbaugh Empire Co., 271 U. S. 170, wherein other authorities are cited. “ In determining what constitutes income, substance rather than form is to be given controlling weight.” Bowers v. Kerbaugh Empire Co., supra; Eisner v. Macomber, 252 U. S. 189.

The facts in this case do not convince us that the Commissioner has improperly construed the law, or that he has committed error in his determination of the tax liability of this petitioner.

It is apparent that the trustees approached the problem of Beatty’s retirement with great reluctance. They appreciated his past services and they also appreciated the fact that it was necessary for them to select another man for his place who was physically able to carry on the good work of the Department. They had not yet put into effect any system of pensions. In this dilemma they passed the resolutions quoted in our findings of fact. By these resolutions they gave him an honorary title and as a recognition of his valued and honored labor they paid him $500 a month. He accepted these things. The resolutions retired him from actual service, but his name was still connected with the Department of Fine Arts of the Institute and he was still on the pay roll. We are unable to say that the payments were without consideration, or that they did not represent gain derived from labor, or that they were not properly included in income.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Littleton :

text:
    Hess Brothers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8039.
    Promulgated July 26, 1927.
    1. Traveling and other necessary expenses incurred by officers of a corporation in carrying on its business are deductible in computing the corporation’s taxable income, when such expenses are duly authorized and are shown to have been ordinary and necessary business expenses.
    2. The cost of additions and improvements made by a tenant on business property leased for a definite term should be treated as a capital investment and exhausted over the period of the lease or the life of the improvements, whichever is the shorter.
    3. The Commissioner correctly reduced surplus by the amount of income and profits tax for the preceding year, prorated from the date payable.

      W. G. Magathan, Esq., for the petitioner.

      T. M. Wilkins, Esq., for the respondent.
    The Commissioner determined deficiencies in income and profits tax as follows:
    January 31, 1920-$11, 796. 62
    January 81, 1921___ 3, 074. 80
    January 31, 1922_ 3,716. 60
    January 31, 1923_ 2, 362.20
    Total- 20, 950.22
    Petitioner claims errors were committed in reference to the following :
    (1) Disallowance of traveling and other ordinary and necessary expenses of officers in carrying on the business of the corporation.
    (2) Depreciating the cost of alterations or improvements made on business property leased for a definite period, over estimated life of the improvements instead of over the lesser period, the term of the lease.

      (3) Erroneous reduction of invested capital on account of preceding year’s tax.
    FINDINGS OF FACT.
    Petitioner is a Pennsylvania corporation with its principal office and place of business in Allentown.
    During the taxable years in question, the petitioner conducted a general department store, the largest in Allentown. Its sales ranged during the taxable years from about $3,000,000 in 1920 to over $4,000,000 in 1923. The property leased and used by petitioner consisted of a large store building, dimensions about 185 feet front by 230 feet deep, on the main street in Allentown. The building was five stories and basement. In addition to this there were a large stable and lot covering a full half block, a garage, and warehouses.
    Max Hess was president of the corporation during 1920, 1921, and during 1922 until his death in February, 1922, at which time he was succeeded by William T. Harris, who thereafter continued to serve as president. Charles Hess was vice president during the taxable years and Solomon Hoffman was secretary. Prior to the death of Max Hess, William T. Harris was treasurer.
    During the taxable years the stock of the petitioner was owned as follows:
    Shares
    Max I-Iess-1, 575
    Cliarles Hess-1» o75
    William T. Harris- 750
    Solomon Hoffman- 750
    William Bellringer- 250
    John Diefenclerfer- 150
    Kaufman- 100
    Sell_ 100
    All of the stockholders were active in the business, either as officers or as assistant managers.
    After the death of Max Hess, 575 shares of his stock was owned by his widow and 1,000 shares by his son. -
    The president of petitioner called weekly, semi-weekly and monthly meetings of the stockholders and directors, when the general conduct of the business was discussed, and corporate business conducted in a rather informal manner. At one of such meetings in the fiscal year 1921, it was proposed that the president and vice president should be paid the amount of $150 per week each for traveling and other expenses incurred by them on business for the corporation and all the stockholders agreed to this.
    The total amounts received by Max Hess and Charles Hess, by virtue of the allowance of $150 per week each for traveling and other necessary expenses incurred by them on business of the corporation, were for the years ended:
    January 31, 1921_$12,450
    January 31, 1922_ 15,600
    January 31, 1923- 15,050
    For the year ended January 31, 1920, these officers paid their own expenses without reimbursement.
    The president served as general manager of the corporation and superintended all the buying of merchandise for the store. The vice president was the foreign representative of the corporation. He spent about nine months of the year abroad, engaged in buying foreign merchandise and keeping the store in touch with the changes in styles and novelties. The remaining three months of the year he spent at Allentown and in New York and other domestic markets engaged in similar work.
    The duties of Max Hess and William T. Harris as president and superintendent, aforesaid, necessitated frequent trips by them to New York, sometimes as many as three trips within a week and they were often compelled to stay in New York all week.
    On such trips Max Hess, as president, and subsequently William T. Harris, as president, were expected to pay, and did pay, the expenses of themselves and buyers or other employees accompanying them, and also such expenses for meals, transportation, etc., of salesmen and others with whom they transacted business for the corporation. It was the policy of petitioner that their buyers and other representatives should never accept gratuities or entertainment from the persons with whom they were dealing.
    The payments of $150 per week to the president and vice president each were made regularly, beginning April 17, 1920, and were either paid by check or were credited to the personal accounts of such officers on the corporate books. Such officers received no reimbursement for expenses made, as heretofore indicated, other than the $150 weekly, which weekly allowance for such expenses did not fully reimburse them for the amounts actually expended in the corporation’s behalf. The expense of maintaining personal automobiles while used in the business of petitioner was a part of the expenses covered by the said $150 weekly allowances. The said automobiles were used on trips to market cities, frequently loaded with buyers and were also used in making deliveries of merchandise for petitioner. They were so used on an average of four days a week on the business of the company.
    The business property of petitioner was leased from Max Hess and Charles Hess, aforesaid, by written lease for one year from April 1, 1919, and yearly thereafter, by new written leases, until there was made in 1922 a lease for ten years from September 1, 1922, to September 1, 1932. The ten-year lease was made to petitioner by Charles Hess and the Lehigh Valley Trust Co., Trustee, which executed the lease by virtue of the trust created by the will of Max Hess, deceased, and by authority granted by the Orphans’ Court.
    Under the terms of the leases, the petitioner was liable for the cost of■ improvements and betterments placed on the property by it and the title to such was to vest in the lessors. The leases gave the lessee no unconditional option or right of renewal. There was a clause in each yearly lease providing that if the lessors permitted the tenant to hold over the term, such holding over should be considered a renewal of the lease for one year. There was also a provision in the lease to the effect that the notice to quit required by any act of assembly previous to proceedings to recover possession of the demised premises was waived by the lessee. There was, however, no holding over as a new lease was made each year before the expiration of the existing lease.
    The rentals paid were $60,000 for the first one-year lease; $75,000 for the second; $100,000 for the third; and for the ten-year lease, $112,000 per annum.
    The cost of alterations or improvements made by petitioner on said leased property in 1920 was $7,633.92 and in 1923, $47,630.79.
    The Commissioner capitalized such expenditures and computed the deduction for exhaustion, wear and tear, on these expenditures, at the rate of 4 per cent per annum, based upon the physical life thereof, without regard to the terms of the one-year lease in 1920 and the ten-year lease in 1923.
    The petitioner kept its books and made its returns on the accrual basis.
   OPINION.

Littleton :

The Board is of the opinion that the payments of $150 weekly to each, the president and vice president of the petitioner, during the fiscal years 1921, 1922, and 1923, for traveling and other necessary business expenses while engaged on business of the petitioner, were ordinary and necessary expenses paid or incurred during those years in carrying on petitioner’s business and were proper deductions in computing the net income of petitioner.

The total of such payments made in each of the years was as follows:

Fiscal year 1921---$12, 450
Fiscal year 1922- 15, 600
Fiscal year 1923- 15, 050

The fact that the president and vice president were not required to keep itemized expense accounts is not material, as the evidence shows that the sums were authorized by the petitioner; were expended by the officers in the carrying on of the business and were, in fact, less than the amounts actually expended by said officers. Julius Forstmann, 6 B. T. A. 21.

The petitioner made no such payment for ordinary and necessary expenses to the president and vice president in the fiscal year 1920, nor did it deduct such an amount from its gross income in computing net income. The said payments of $150 per week were not begun until April 17, 1920, and respondent was in error in holding otherwise and increasing petitioner’s income in the amount of $15,600 for the fiscal year 1920, on the theory that such amount had been paid and deducted from income.

The respondent also committed error in stating the amount of business expenditures claimed as deductions by petitioner for the year 1921 as $15,600, whereas petitioner expended in payments to its president and vice president for that year the sum of $12,450, and only claimed deduction for that amount.

The petitioner expended $7,633.92 in the fiscal year 1920 and $47,630.79 in the fiscal year 1923 on alterations and improvements made on its business property. At the time $7,633.92 was expended, petitioner had only a one-year lease on the property in question. When the $47,630.79 was expended, petitioner then had a lease covering a period of ten years. Both leases were for definite periods and in neither was there given any option or right of renewal to the lessee.

The expenditures so made were capitalized by respondent and depreciated over a period of 25 years, the estimated useful life of the improvements. The petitioner admits that the expenditures may be properly capitalized, but such cost should be exhausted over the life of the leases and not the life of the improvements.

In view of the fact that the leases were for a definite and fixed period, with no unconditional right or option to renew, the Board is of the opinion that the expenditures for alterations and improvements in the amount of $7,633.92 made during the fiscal year 1920 upon the property occupied under a lease for one year only, are deductible in full in computing the petitioner’s net taxable income for tbe fiscal year 1920.

The Board is further of the opinion that in computing the petitioner’s net taxable income for the fiscal year 1923, the correct deduction for depreciation on alterations, additions and improvements made during said fiscal year to the business property mentioned under the lease for ten years, is one-tenth of $47,630.79, the total expenditures for that year, and that the Commissioner was in error in depreciating the same over the useful life of the property, estimated to be 25 years.

The petitioner’s invested capital for the fiscal years 1920, 1921, and 1922 was correctly reduced by the respondent on account of income and profits tax for the preceding year. Russel Wheel & Foundry Co., 3 B. T. A. 1168.

Reviewed by the Board.

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


author: Smiti-i :

text:
    Seward Prosser, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8520.
    Promulgated July 26, 1927.

      The petitioner was a trustee in connection with the reorganization of a corporation. Upon the completion of his duties he was offered $10,000 for compensation, but refused to receive the same for himself until certain notes held by the Bankers Trust Co. of New York City should have been paid off. The money was placed in escrow with the Bankers Trust Co. as escrow depositary and was to be held as security for the payment of those notes until the same .were paid. The money and the income therefrom was not received by the petitioner during the years 1923, 1924, or'1925. Held, that the petitioner derived no income from the $10,000 in 1923.

      Henry Mannix, Esq., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1923 in the amount of $4,275 arising from the addition to the petitioner’s reported net income of $10,000 alleged to have been received by him as an honorarium for services performed as trustee in connection with the reorganization of a corporation.
    FINDINGS OF FACT.
    The petitioner is an officer of the Bankers Trust Co. of New York City, and in 1923 was chairman of its board of directors. Mills & Gibb, Inc., a New Jersey corporation, became insolvent in May, 1916. Two new corporations were organized for the purpose of taking over the business and assets of the insolvent corporation and accomplishing the ultimate repayment of creditors. One of these corporations was an operating company and the other a holding company, which held all the stock of the operating company. The stock of the holding company was placed in a voting trust dated November 27, 1916. The petitioner was appointed one of the three original voting trustees under this agreement and performed duties in that capacity from the rime of his appointment until the termination of the voting trust in 1923.
    For the purpose of obtaining funds to pay off the notes of the holding company, a new corporation, Mills-Fogarty Corporation, was organized in 1923. This corporation sold for cash $475,000 of its Class A 6 per cent notes, $375,000 of which were purchased by a group of banks in New York City, the participation therein by the Bankers Trust Co. being $225,000. The petitioner was largely responsible for these reorganization plans and was instrumental in having the Bankers Trust Co. and other banks purchase the $475,000 of notes.
    Upon the completion of the reorganization of the business the voting trustees had no further functions to perform. The voting trust agreement contained no provision for compensation to the voting trustees and they had no legal claim against the corporation for compensation, but the corporation was desirous of making some payment to the petitioner as an honorarium in appreciation and recognition of the services rendered by him to the corporation and, therefore, proposed to pay the petitioner and each of the other voting trustees the sum of $10,000. On account of his fiduciary relationship towards the Bankers Trust Co. the petitioner felt he could not with propriety accept any honorarium from the holding company until the $375,000 Class A notes of its Mills-Fogarty Corporation, held by the Bankers Trust Co. and the other banks, were fully paid. He so advised the holding company. Thereupon, that company at the suggestion of the petitioner paid $10,000 to the Bankers Trust Co. as escrow depositary to be held by it until payment was made in full of the $375,000 of notes in question. The check dated May 31, 1923, was made payable to the order of “ Bankers Trust Company — Escrow Depositary,” and was signed by Seward Prosser, President, and H. H. Martin, Treasurer. On the same date, May 31, 1923, the petitioner, as an officer of the corporation, addressed a letter to the Bankers Trust Co., reading as follows:
    Mat 31, 1923.
    Bankers Trust Company,

      16 Wall Street, New York, N. Y.

    Gentlemen: For my services as a Trustee of M. & G. Properties Company, Inc., appointed under tlie agreement dated November 27, 1916, in connection witb the reorganization of Mills & Gibb, there has been paid to me the sum of $10,000. I am unwilling to accept and retain for my own account this compensation, although advised I could properly do so, unless and until the full amount of the notes of the Mills-Fogarty Corporation, endorsed by George B. Fogarty, known as Class A 6% Collateral Gold Notes, now outstanding at this time and amounting to tlie sum of $375,000, are fully paid. I therefore hand you herewith the sum of $10,000, which I ask you to hold in escrow as follows:
    1. You will hold this amount on deposit or invest it as I may direct.
    2. You will continue to hold for deposit or such investment as you may make, until such time as the holders thereof shall receive payment in full of the said notes of the Mills-Fogarty Corporation endorsed by George R. Fogarty as additional collateral security for the payment of said notes. In the event that the holders do not receive payment of said notes in full, you will use said deposit or the proceeds of the investment toward making up any difference which may exist.
    3. If, however, notice is received by you that funds have been provided for the payment of the notes in full, you will return the said deposit or the securities in which the sum may have been invested, together with accrued interest thereon to me. I have filed a copy of this letter with the Bankers Trust Company as Trustee, requesting that the notices above provided may be given to you.
    4. The terms of this letter shall expire on February 10, 1926, at which time the securities or cash shall be returned to me unless I elect at that time to extend the period over which these instructions are to run.
    Very truly yours,
    (Signed) Seward Prosser.
    At the bottom of the letter was an acceptance by the Bankers Trust Co. of the terms of the above letter, signed by B. W. Jones, vice president.
    Up to the middle of 1926, the notes had not been fully paid and the Bankers Trust Co. as escrow depositary still retained the $10,000 and the proceeds therefrom. The petitioner has never received for -his own use any part of the said sum of $10,000, nor interest thereon, as compensation, nor has he enjoyed any benefits from the use thereof, nor has said sum ever been subject to the petitioner’s demand.
    The petitioner reported his income for 1923 upon a cash receipts and disbursements basis.
   OPINION.

Smiti-i :

Whether the item in controversy was -intended as compensation for services performed or was intended as a gift is not material. In any event it did not constitute taxable income to the petitioner unless and until received by him.

We have found as a fact that the petitioner did not, during the year 1923, actually receive or hold any legal claim for any part of the amount or proceeds thereof. The respondent seeks as an alternative to invoke the doctrine of constructive receipt. No deposit of the sum in question was ever made to the credit of the petitioner at any place. There was a tender of the amount by the M. & G-. Properties Co., Inc., which' the petitioner for reasons of propriety and within his rights refused to accept. The petitioner thereupon made a proposal to the M. & G. Properties Co., Inc., which it accepted, that the sum tendered be paid over to a third party, to whom the petitioner was under no legal obligation, to be held for payment to the petitioner upon the happening of an uncei’tain future event. No ownership, control, or use and enjoyment of the sum was ever exercised by the petitioner. It was held by the escrow depositary subject to conditions that might have prevented the petitioner from ever receiving any part of it. The escrow agreement specifically stated that the petitioner was unwilling to and would not receive the money until the notes held by the Bankers Trust Company had been fully paid. There may be, as the respondent contends, some doubt as to the enforceability at law of the terms of the escrow agreement, but the question is not material. So far as is shown the terms of the agreement have been at all times carried out. Up to the middle of the year 1926, at which time the Bankers Trust Co. still held the principal and all the proceeds, the petitioner had not, in our opinion, received any income in respect of such amount. The deficiency resulted entirely from the addition to net income of the $10,000 in question.

Reviewed by the Board.

Judgment of no deficiency will be entered for the petitioner.