author: Littleton:

text:
    Appeal of ACME, PALMERS & DeMOOY FOUNDRY CO.
    Docket No. 4211.
    Submitted December 7, 1925.
    Decided March 31, 1926.
    1. The denial by the Commissioner of a claimed loss of good will through the sale by a successor corporation of certain of its tangible assets approved.
    2. Profit upon the sale of capital assets determined upon the evidence.
    3. The Commissioner’s determination of the invested capital of the taxpayer, which was a successor through a reorganization of two corporations, under the provisions of section 331 of the Revenue Act of 1918, approved.

      E. J. Brunenlcant, Esq., for the taxpayer.

      John D. Foley, Esq., for the Commissioner.
    Before James, LittletoN, Smith, and TRUssell.
    This appeal is from the determination of a deficiency in income and profits tax for the calendar year 1920 in the amount of $28,-974.59, arising from the inclusion in income of alleged profits from the sale of capital assets, instead of an allowance of a loss thereon, as claimed by the taxpayer; also, the exclusion from invested capital of $99,132.64, alleged value of good will.
    FINDINGS OE FACT.
    The taxpayer is an Ohio corporation, with a capital stock of $400,000, organized in 1919 to take over the business and property of The Palmers <& DeMooy Foundry Co. and the Acme Foundry Co. Its place of business is at Cleveland.
    The Palmers & DeMooy Foundry Co. was founded in the year 1886 and was operated as a partnership until the year- 1890, when it was incorporated with a capital stock of $100,000. The amount of $72,600 was set up on the books as representing the value of tangible assets, and $27,400 as representing the value of good will acquired from the partnership.
    The Acme Foundry Co. was incorporated in the year 1900. On July 1,1919, its outstanding capital stock was $150,000.
    On July 1, 1919, the stock of The Palmers & DeMooy Foundry Co. of the par value of $100,000, together with $5,000 in cash, was transferred to the taxpayer for its capital stock of the par value of $155,000. On the same day the entire capital stock of the par value of $150,000 of the Acme Foundry Co. and $5,000 in cash were transferred to the taxpayer for the remainder of its capital stock of the par value of $245,000. Immediately thereafter the assets of The Palmers & DeMooy Foundry Co. and the Acme Foundry Co. were transferred to the taxpayer, and it later sold the assets so acquired from The Palmers <& DeMooy Foundry Co. under the circumstances hereinafter set forth. In its balance sheet as of July 1, 1920, the taxpayer included good will in the amount of $67,071.69. This item does not represent an evaluation of the good will of either The Pal-mers & DeMooy Foundry Co. or the Acme Foundry Co. but was merely a balancing entry, representing the excess of the par value of the capital stock issued over the book value of the tangible assets acquired from the two companies.
    The plant of The Palmers & DeMooy Foundry Co. was located in a section of Cleveland known as the “ flats,” possessing advantageous rail terminal facilities and being also in close proximity to the principal hotels and labor markets on the “ Square.”
    Shortly after July 1, 1919, a certificate of convenience and necessity was granted by the Interstate Commerce Commission to the Van Sweringen interests for the construction of a Union Station at the “ Square.” The Palmers & DeMooy Foundry Co.’s plant was located on the proposed Union Station site, and negotiations were at once begun by the Van Sweringens to acquire The Palmers & De-Mooy site, either by direct purchase or by condemnation proceedings, with the result that a contract of sale was consummated whereby the plant of The Palmers & DeMooy Foundry Co., including the land, leaseholds, buildings, machinery, and equipment, were sold to M. J. and O. P. Van Sweringen as of January 1, 1920, for $91,600.
    The management of The Palmers <⅞ DeMooy Foundry Co. had always followed a very conservative policy with respect to the valuation of its assets, and for many years had charged the cost of replacements of buildings, equipment, and machinery to expense. For instance, at one time, an annex to a building was constructed at a cost of $4,000, which was charged to expense. Likewise, replacements to tumbling room, machinery, and equipment, costing about $34,000, were charged to expense. The net depreciated cost, as shown by the taxpayer’s books, of the assets sold to the Van Sweringens, exclusive of leaseholds, as of January 1, 1920, the date of sale, was $60,741.33.
    The leasehold interests included in the assets sold covered several parcels of real estate with unexpired terms of from one to eight years. The value of these leaseholds was $6,009.88 on July 1, 1919, and $5,678.06 on January 1, 1920.
    In computing the profit upon the sale to the Van Sweringens the Commissioner determined that the depreciated cost of the assets sold was $42,008.12, denied the taxpayer’s claim that it suffered a loss, through the sale of the tangible assets of The Palmers & DeMooy Foundry Co., of the good will thereof of the value of $86,400.04, and that the amount of the profit was $49,519.88. Apparently no value was ascribed to the leaseholds. He also reduced invested capital claimed by the taxpayer for the year 1920 in the amount of $99,132.-64, as a result of applying the provisions of section 331 of the Bev-enue Act of 1918.
   OPINION.

Littleton:

The first question concerns the amount of profit or loss upon the sale in the year 1920 of the tangible assets acquired from The Palmers & DeMooy Foundry Co.

The Commissioner contends that the taxpayer realized a profit of $49,519.88 from the sale, and the taxpayer claims that it sustained a loss of $60,241.35, in that, as a result of the sale, it lost the good will it had acquired from The Palmers & DeMooy Foundry Co., for which it claimed a value of $86,400.04.

We are satisfied from the evidence that the depreciated cost at the date of sale of the tangible assets sold was $66,419.39, and that a profit of $25,180.61 resulted,, exclusive of "the value, if any, of the good will acquired from The Palmers & DeMooy Foundry Co., instead of a profit of $49,519.88, as determined by the Commissioner. We do not, however, agree with the taxpayer’s contention that, as a result of the sale of the tangible assets, it lost whatever good will it had acquired from the Foundry Co. We do not believe, and it is not established by the evidence, that the good will of The Palmers & DeMooy Foundry Co. attached solely to its tangible assets and the location of its plant. We are satisfied that the good will, or at least a great part thereof, was bound up with and attached to the name of “The Palmer & DeMooy Foundry Company” which the taxpayer incorporated in its own corporate name, and which it still retained after the sale of the assets. Even if'we were to conclude, which we do not, that at least a part of the good will of the Foundry Co. was attached to its tangible assets and the location of its plant, there are no facts before us from which we could determine the value of that part. In our opinion, the evidence does not establish that through the sale in question the taxpayer suffered a loss or diminution in value of whatever good will it had acquired from the Foundry Co. We therefore find that the taxpayer realized a profit of $25,180.61 on the sale.

With reference to the second question, the taxpayer alleged that the Commisisoner reduced its invested capital for the year 1920 by the amount of $99,132.64 “ on the basis of balance sheet adjustments of tangible assets and good will,” whibh allegation was admitted by the Commissioner in his answer. Further than is disclosed by the allegation and the admission, the record does not show the nature of the adjustments. The taxpayer also alleged, in connection with this item, that in exchange for its capital stock it acquired tangible assets, that is, the capital stock of the two predecessor corporations and not their assets, which allegation, when read in connection with the other allegation just quoted, would indicate that the adjustment related to the exclusion from the taxpayer’s invested capital of good will set up on its books as having been taken over from two other corporations. The Commissioner explained that, in computing the invested capital, he applied the provisions of section 331 of the Revenue Act of 1918 in determining the value of the tangible and intangible assets acquired from the predecessor corporations for stock. The amount at which the tangible and intangible assets of the two predecessor corporations could be included in the invested capital of the taxpayer for 1920 is governed by section 331 of the Revenue Act of 1918, which provides that—

In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred and received: * * *

The evidence does not warrant any modification of the Commissioner’s determination of invested capital under the above-quoted section.

Order of redetermination will be entered on 10 days' notice, under Rule 50.


source: Caselaw Access Project

author: Love:

license: Public Domain

text:
    Appeal of LEASEHOLD REALTY CO.
    Docket No. 1727.
    Submitted August 20, 1925.
    Decided March 31, 1926.
    Certain instruments denominated preferred stock issued by the taxpayer corporation, under their terms and conditions, held to be preferred stock and not evidence of indebtedness.

      George F. Killing er, Esq., for the taxpayer.

      B. H. Saunders, Esq., for the Commissioner.
    Before Mabquette, Moeeis, GbeeN, and Love.
    •This is an appeal from the determination of a deficiency in income taxes for the years 1919 to 1921, inclusive, in the aggregate amount of $965.98.
    The deficiency arose from the action of the Commissioner in treating certain alleged interest payments as dividends on preferred stock.

      BINDINGS OP PACT.
    The taxpayer is an Indiana corporation with its principal office in Indianapolis. Its authorized capital stock consisted of:
    Common stock_$100, 000
    First preferred stock_ 115, 000
    Second preferred stock_ 25, 000
    It issued said preferred stock and paid dividends on same as follows:
    In 1919_$6,489. 50
    In 1920_ 6, 586. 50
    In 1921_ 6, 323.00
    The following is a copy of an unissued certificate of said first preferred stock and contains all the essential elements of the issued certificates, except in regard to the filling in of the blanks appropriate to each individual case:
    INCORPORATED UNDER THE LAWS OF THE STATE OF INDIANA
    Number 238 Common stock $100,000.00 Shares -
    The Leasehold Realty Company Indianapolis, Indiana.
    First Preferred Stock Second Preferred Stock
    $115,000.00 $25,000.00
    Series July 1, 19—
    This Certifies that-is the holder of-fully paid up and non-assessable shares of the par value of One Hundred Dollars each of the first Preferred Stock of the The Leasehold Realty Company, transferable only on the books of the Company in person or by proxy on the surrender of this certificate.
    The holder hereof shall be entitled to a quarterly dividend of one and three-eighths per cent, upon the face value hereof, payable on the first days of January, April, July and October (the first payable July 1, 1916), payable before any dividend is paid or set aside for the benefit of the Common or second Preferred Stock, and such dividends shall be cumulative. In event of liquidation, the holder hereof shall be entitled to receive the par value hereof, plus all accumulated dividends, before anything whatever is paid on account of the second Preferred or Common Stock, and shall not participate further in the liquidation.
    The Realty Company will retire this stock at par, plus accrued dividends, on the first day of July, 19 — , and it may, at its option, retire the same at any dividend date after July 1, 1920, and before the date fixed for the absolute retirement, at 102 per cent of par, plus all accrued dividends: Provided, stock to be retired prior to maturity shall be selected by lot from that last maturing, and sixty (60) days’ prior written notice shall be given to the registered holder of the shares selected for redemption.
    The Realty Company agrees that it will not convey or incumber its leasehold estate at the northwest corner of Market and Delaware Streets, in the City of Indianapolis without the consent of all its Preferred stockholders. If It should violate any of the provisions hereof, or if it incur indebtedness after the erection of its new building on said real estate in excess of $1,500, or if it fail to pay its dividends hereon, or to redeem this stock at the time fixed herein, then at the option of the holder hereof this stock shall immediately mature and the holder hereof shall be entitled to require the liquidation of said Company and the application of its assets to the payment of its creditors and stockholders in the order provided by the law and by this certificate.
    This certificate shall not be valid until registered by The Union Trust Company of Indianapolis, as registrar.
    The quarterly payments made by the taxpayer were entered upon its books under a “ Dividend Account,” and the various amounts, including the amounts in controversy, were debited to “ Quarterly Dividends.”
    No formal declaration of dividends was entered upon the records of the board of directors as each installment became due, but the respective amounts were entered and credited upon its books to the stockholders as routine business. There was always sufficient surplus from which to pay the same and the taxpayer did not default in any of the conditions provided in the preferred stock certificates.
    The taxpayer deducted from income the payments of dividends on the preferred stock, on the theory that said payments were interest on indebtedness, but the Commissioner disallowed such deductions and increased income accordingly, resulting in the deficiency in controversy.
   OPINION.

Love:

The sole question at issue is whether the document quoted in the findings of fact is a stock certificate or an evidence of indebtedness, resulting in the question whether or not the so-called dividends were, in fact, dividends on stock or interest on an indebtedness.

It will be noted that the certificate in question (1) represents a part of the authorized capital stock of the corporation; (2) it is issued, in the ordinary form of a preferred stock certificate; (3) it provides for quarterly dividends, such dividends to be cumulative; (4) it is not secured by mortgage or otherwise and does not purport to carry precedence over creditors; and (5) the date designated for retirement was fixed in each certificate, and, in event of its being called at any time prior to such date, in addition to payment of all accrued dividends, a premium of 2 per cent was provided for.

While it is the generally accepted rule that the name given to the instrument is not conclusive of its character and that inquiry will be made as to its real character, there is in this particular case no material evidence that this instrument is not what it purports to be on its face. The taxpayer points out that the instrument provided for a definite maturity date, a stipulated dividend, that the company will not convey or incumber a certain leasehold without the consent of the stockholders, or incur indebtedness in excess of $1,500 after a certain building is constructed, and that, in default in carrying out any of the provisions, the holders will be entitled to require liquidation. None of these characteristics are uncommon to preferred stock or affect the conclusions reached in the authorities hereinafter quoted.

In Indiana it is well settled that preferred stock is not in effect a loan and that the owner thereof is not a corporation creditor.

It is, however, contended by appellees that the purchase of preferred stock in an Indiana corporation is in effect a loan; but this position is untenable. The holder of preferred stock is a shareholder in the corporation. He is not a corporation creditor, and has no rights as such. His rights are those of the common shareholder, except as those rights are limited by the statute and the contract, and the additional right to have his dividends paid out of the earnings and his stock redeemed out of the assets in preference to the common shareholder. 1 Cook on Corporations, §§ 267-271; Burns’ Ann. St. 1901, §§ 5066, 5067, 5068. The purchase of stock of a corporation is not a loan to the corporation of the amount of said stock. None of the elements of debtor apd creditor exist. The purchase of stock is the purchase of so much of an interest in the assets and affairs of such corporation. Grover v. Cavanaugh, 40 Ind. App. 340; 82 N. E. 104.

Ordinarily, a preferred stockholder, even though the preferred dividend is in terms guaranteed, is not to be regarded as a creditor of the corporation, so as to be entitled to compete with other creditors-in the distribution of the assets of the corporation, or for any other purpose; he is a stockholder like the holders of common stock, the only difference being that he is entitled to a certain preference over them.

This view is sustained by many leading authorities. Warren v. King, 108 U. S. 389; Armstrong v. Union Trust & Savings Bank, 248 Fed. 268; Spencer v. Smith, 201 Fed. 647; Grover v. Cavanaugh, 40 Ind. App. 340; 82 N. E. 104. In the case of Armstrong v. Union Trust & Savings Bank, supra, there was a ten-year retirement provision and the dividend provision was denominated as “interest,”' but the court held that a holder of such preferred stock was not a creditor but had only the rights of a stockholder.

In the instant appeal it is not necessary to rely upon the authorities quoted, as the lang'uage of the instrument is certain and unambiguous. The first paragraph provides:

This Certifies that-is the holder of-fully paid up and non-assessable shares of the par value of One Hundred Dollars each of the first Preferred Stock of The Leasehold Realty Company, transferable only on the books of the Company in person or by proxy on the surrender of this certificate.

Throughout the instrument there are frequent references to “ dividends,” “ preferred stock,” and “ stockholder.” There is nothing in the instrument to give the strained construction that the taxpayer would put upon it. If it really were intended that the transaction was to secure money as a loan, it would have been just as convenient and easy to issue bonds or notes to carry out such intention.

The taxpayer further argues that, since its minute book did not disclose a record of a formal declaration of dividends at each installment period, the dividends were unauthorized and that the payments made were, therefore, expense items. It is clear, however, that the amounts were entered upon its books under a “ Dividend Account,” were entered expressly as “ Dividends,” and were undoubtedly acquiesced in by the directors and stockholders. As these payments were 'fixed by the express contract in the certificates and as there was in fact sufficiently earned income for a surplus, the taxpayer may not have considered it necessary to make a formal declaration of dividends at each period, but the mere failure to enter the authorization in its records or expressly to authorize the dividends each time would not, in itself, void the dividends to the extent that the corporation itself can take advantage of its own errors.

Testing the instrument here involved in the light of many decisions of our higher courts and by the provisions of the instrument itself, we conclude and hold that the certificates in question are stock certificates and not evidence of indebtedness, and that the periodical payments thereon were dividends and not interest. Appeal of I. Unterberg & Co., Inc., 2 B. T. A. 274; Appeal of Kentucky River Coal Corporation, 3 B. T. A. 644.

The deficiency for the year 1919 is $133.28; for 1920, $384-24; and for 1921, $U846. Order will be entered accordingly.


text:
    Appeal of DAVID H. BELLAMORE.
    Docket No. 6385.
    Submitted February 10, 1926.
    Decided March 31, 1926.

      Walter A. Oooper, O. P. A., for the taxpayer.

      Ellis W. Manning, Esq., for the Commissioner.
    Before SteRNHagen, LaNSdoN, and Aktjndell.
    This is an appeal from the determination of a deficiency in income tax for the year 1920 in the amount of $1,853.63. It arises from the Commissioner’s disallowance of a deduction for a loss of $5,408.39, alleged by the taxpayer to have been sustained in the taxable year in a transaction entered into for profit.
   FINDINGS OF FACT.

The taxpayer is a resident of New York. Some time in the year 1919 he purchased a power boat for a price not disclosed by the record, and during the remainder of such year, and also in 1920, spent substantial amounts in repairing and conditioning said boat for the purpose and with the expectation of reselling it at a profit. He sold the boat in December, 1920, for a price which the Commissioner admits resulted in a loss in the amount of $5,408.39. He was not a yachtsman, had never theretofore owned a boat of any kind, and made no use of the vessel in question for pleasure or recreation. During the entire period of his ownership of such boat he made not more than nine short trips on the same, and then only for the purpose of demonstrating it to prospective purchasers.

Order of no deficiency will be entered accordingly.


text:
    Appeal of RICHARD F. BURGESS.
    Docket No. 1311.
    Submitted January 19, 1926.
    Decided March 31, 1926.

      R. F. Burgess, Esq., pro se.

      John W. Fisher, Jr., Esq., for the Commissioner.
    Before James, LittletoN, Smith, and Teussell.
    This appeal is from the determination of a deficiency in income tax in the amount of $807.85 for the year 1921.
   FINDINGS OF FACT.

The taxpayer is an individual residing at El Paso, Tex., engaged in the practice of law, and during the year 1921 was the head of a. household and the sole support of his unmarried dependent daughter.

In the said tax year 1921 the taxpayer received a retainer of $1,200 from the Two-Republics Life Insurance Co., which said $1,200 was reported as income of the law partnership of which taxpayer was a member and was included in his distributive share of the income of that firm.

The taxpayer during the year 1921 also received the sum of $3,120 as rents from certain properties managed by Broaddus & LeBaron, real estate agents at El Paso, Tex. The net income, after deduction of taxes, repairs, and insurance from said property, was $2,222.50, which sum the taxpayer included in his return for 1921.

For the said year 1921 the said firm of Broaddus & LeBaron reported to the Commissioner on Information Form 1099 as having paid to the taxpayer for wages, fees, commissions, etc., the amount of $1,738.74, which said amount was reported in error and was not received by the taxpayer in the said year .

Order of no deficiency will be entered accordingly.


text:
    Appeal of J. W. ALLEN & CO.
    Docket No. 4785.
    Submitted October 30, 1925.
    Decided April 1, 1926.

      E. B. Van Veen, Esq., for the taxpayer.

      Thomas P. Dudley, Jr., Esq., for the Commissioner.
    Before Littleton, Smith, and TRUssell.
    This is an appeal from the determination of deficiencies in income and profits tax for the calendar years 1919, 1920, and 1921, in the amounts of $404.42, $276.41, and $16.41, respectively. The taxpayer claims that the Commissioner erred in holding that invested capital for the years above mentioned should be reduced on account of the tax for the year 1918, which it alleges was erroneously determined for the reason that invested capital for that year was reduced by the amount of $29,013.70 on account of a dividend of $30,000 prorated from January 21, 1918; that the dividend of $30,000 was not formally and legally declared, and that it was paid on June 20, 1918, without formal legal action on the part of the directors. The petition also alleges that the Commissioner erred in holding that the part of the dividend paid by transfer of stock (inadmissible asset) should be excluded from the computation of the deductions from invested capital as of January 21, 1918.
   FINDINGS OP PACT.

The taxpayer is an Illinois corporation with principal office at Chicago where it is engaged as a dealer in confectioners’ and bakers’ supplies. It was organized in 1906, since which time it has been a close corporation, the officers, directors, and principal stockholders prior to January 13, 1918, being J. W. Allen, his wife, E. M. Allen, and their son, H. W. Allen. No formal meetings of the directors were ever held. The policy of the corporation and such actions as were taken from time to time by it wrere determined upon in conversations between J. W. Allen and his son. From time to time such resolutions as were necessary were drawn, signed, and entered of record. J. W. Allen, president of taxpayer, died on January 13, 1918. On May 20,1918, W. N. Allen, wife of H. W. Allen, was made a director. The minutes of the taxpayer show the following:

A special meeting of tlie Board of Directors of J. W. ALLEN & OO. was called by Mr. H. W. Allen, as Treasurer, by reason of tbe death of Mr. J. W. Allen on January 13, 1918, said meeting being held at the office of said company on January 21, 1918, at 10 A. M., with the following Directors present:— H. W. Allen and E. M. Allen.
The meeting was called to order and Mr. H. W. Allen stated that during the year 1917, a surplus had accumulated from the earnings of the company and he desired that a dividend of 20% be declared on the capital stock of said company.
Upon motion duly made and seconded and unanimously passed, the Board of Directors declared a dividend of 20% on the capital stock of said company to be paid out of the earnings of the company for the year 1917, and that such dividends be paid on demand of the persons entitled thereto.
Mr. H. W. Allen stated that Mr. J. W. Allen left a last will and testament under which Mr. H. W. Allen was entitled to dividend on 500 shares of stock; Hazel G. Ford was entitled to dividend on 190 shares of stock; E. M. Allen entitled to dividend on 299 shares of stock. That the following persons are entitled to a dividend, upon demand, of 20% of the capital stock of the company:
H. W. Allen dividend of_$10,000
Hazel G. Ford “ “_ 3,800
John G. Ford “ “_ 200
E. M. Allen “ “_ 20
E. M. Allen, as per will, “ “_ 5, 980
H. W. Allen, as per will, “ “_ 10, 000
Mr. H. W. Allen stated that on account of dividend upon the capital stock of this company held by him he would accept on account of said dividend the following stock belonging to J. W. Allen & Co., viz:
50 shares Louisiana Live Stock Co. of New Orleans, La., value_$4, 250. 00
200 shares preferred stock, National Chemical Co., $10 each,
200 shares common stock, National Chemical Co., par value $10 each, total value of both_$2,000.00
Mr. H. W. Allen presented an Amendment to the By-laws reading as follows : * * *
Upon motion duly made by Mr. H. W. Allen, seconded by E. M. Allen, that the By-laws of this company be and hereby are amended as above provided, which amendment is made in accordance with Article 18, Section 1, of the By-laws heretofore passed, said motion was unanimously carried.
There being no further business to come before the meeting, upon motion duly made and seconded, the meeting adjourned.
(Sig.) H. W. ALLEN
Secretary.

The books of account show that on January 21, 1918, the above-mentioned dividend of $30,000, payable on demand, was charged to surplus and credited to dividend reserve. Checks were issued and dividend reserve charged June 21, 1918. The minutes further show the following:

A special meeting of the Board of Directors of J. W. Allen & Co., pursuant to By-laws, was called by the Treasurer for May 20, 1918, at 2 P. M„ by agreement of the remaining members of the Board of Directors, to transact such business as might come before the meeting. On said date and hour the remaining directors, H. W. Allen and E. M. Allen met. The meeting was called to order and Minutes of meeting held on January 21, 1918, were read and approved as read.
H. W. Allen stated that on account of a vacancy in the Board of Directors, caused by the death of Mr. J. W. Allen, it was necessary to select one in his place and stead, as provided by the By-laws of this company. By unanimous consent of the Directors present W. N. Allen was elected as Director of this company for the unexpired term of Mr. J. W. Allen, deceased. W. N. Allen, being present, thereupon took part in the proceedings of the meeting.
Mr. H. W. Allen suggested that on account of the death of Mr. J. \V. Allen new officers be elected for the corporation, and it appearing that Mr. H. W. Allen presented his resignation as Secretary and Treasurer, and Mr. H. W. Allen being selected as Chairman of the meeting and 33. M. Allen as temporary secretary, motion was made by W. N. Allen, seconded by E. M. Allen, that the following directors be elected as officers of J. W. Allen & Co. until their suc-¡essors are elected, and that the Secretary cast a unanimous ballot for said officers, as provided by the By-laws:
H. W. Allen, President and Treasurer
E. M. Allen, Vice-president and Secretary.
There being no other nominees, the persons above mentioned were duly elected to the offices stated, and thereupon the Secretary cast the unanimous ballot and declared said officers duly elected.
The question of the salaries of the various officers and directors was also considered. It was therefore moved, duly seconded and unanimously carried, that salaries be paid to the following officers at the rate mentioned and set opposite their names, said salaries to commence on May 1, 1918, and to be paid in monthly installments or such installments as the Officers deem best
H. W. Allen, $500 per month
E. M. Allen, $150 per month.
Each director to be paid the sum of $25 per month for their services.
* * ⅜ ⅜ * * ⅜
There being no further business to come before the meeting, same was duly adjourned.
(Sig.) E. M. ALLEN
Secretary.
W. N. ALLEN
H. W. ALLEN
E. M. ALLEN.

The deficiencies are: For the calendar year 1919, $404-4%; for 1920, ' $276.4.1; and for 1921, $16.41. Order of redetermination will he intered accordingly.


text:
    Appeal of BANK OF ROCKINGHAM.
    Docket No. 4682.
    Submitted October 2, 1925.
    Decided April 1, 1926.

      B. F. Reynolds, Esq., for the taxpayer.

      T. P. Dudley, Jr., Esq., for the Commissioner.
    Before Maequette and Gebek.
    This appeal is from the determination of a deficiency in income and profits taxes for the year 1920 of $2,681.52. The amount in controversy is approximately $1,847.87 and arises from the inclusion in ;he gross income of the taxpayer for that year of certain discounts m notes purchased during the taxable year.
   FINDINGS OP FACT.

The taxpayer is a North Carolina corporation engaged in th< commercial and savings bank business at Rockingham. Its books of account were kept on the basis of cash receipts and disbursements

During the year 1920 the taxpayer discounted certain notes witl accrued interest, the discount upon which amounted to $4,642. Nc part of the said notes was paid during the taxable year 1920.

The Commissioner has included in gross income the said sum oi $4,642 as income to the taxpayer in the year 1920.

The discount in the amount of $1¡.,61¡.2 should be excluded frorr, gross income of the year 1920, and the tax computed accordingly Appeal of Chatham <& Phenix National Bank, 1 B. T. A. ⅛60, Appedl of Bank of Eartsville, 1 B. T. A. 920. Order of redetermination will be entered on 10 days' notice, under Rule 50.


text:
    Appeal of HENRY S. KLINE.
    Docket No. 5284.
    Submitted January 12, 1926.
    Decided April 1, 1926.

      Henry B. Kline, Esq., pro se.

      Ellis W. Manning, Esq., for the Commissioner.
    Before Smith, James, Littleton, and Trussell.
    This is an appeal from the determination of a deficiency in incomí tax for the year 1922 in the amount of $376.13, of which $75.66 is ir controversy. The question in issue is whether the total amount oi premiums paid on a life insurance policy fully paid up prior tc March 1, 1913, or the surrender value of the policy on that date is the basis for computing income derived from the net proceeds oi the policy received at its maturity in 1922.
   FINDINGS OF FACT.

The taxpayer was the insured under policy No. 3377217, issuec 'by the New York Life Insurance Co. on November 29, 1902. The face value of the policy was $10,000. Under its terms 10 annua' premiums of $965.20 each were paid. The policy was fully paic up prior to March 1, 1913. No dividends or other distributions were made upon the policy prior to November 11, 1922, on whicl date the taxpayer received in settlement of the policy $14,830.10 The cash surrender value of the policy on March 1, 1913, was $9,070 The total amount of premiums paid on the policy amounted tc $9,652. The Commissioner based his computation of profit upor a value on March 1, 1913, of $9,070, the cash surrender value.

The deficiency for the year 1922 is $376.13. Order of redetermination will be entered accordingly.


author: Smith

text:
    Appeal of Estate of CHARLES DILLON, EDWARD H. DILLON, Executor.
    Docket No. 4687.
    Submitted October 26, 1925.
    Decided April 1, 1926.
    Tbe value of certain real estate at tbe date of tbe death of the decedent determined.

      Edward T. Quigley, Esq., for the taxpayer.

      J. S. Halstead, Esq., for the Commissioner.
    Before Smith, James, Littleton, and Teussell.
    The taxpayer appeals' from the determination of a deficiency in estate tax in the amount of $4,374.37. The amount in controversy is $4,283.69, and the only point in issue is the value at the date of the death of the decedent of certain real estate located at Hartford, Conn.
    FINDINGS OF FACT.
    Charles Dillon, a citizen and resident of Hartford, Conn., died April 24, 1923. Edward H. Dillon, his brother, was duly appointed and qualified as his executor. He filed a return for Federal estate tax for the estate of the decedent in accordance with the provisions of Title IY of the Revenue Act of 1921. In it he reported the value of the decedent’s interest in the premises at 69-71 Pratt Street, in Hartford, as $110,000. The Commissioner determined that the value was $125,000. The executor also reported the value of decedent’s one-half interest in certain real estate located at the southeast corner of Main and Temple Streets, in Hartford, as $305,000. The Commissioner determined that the value of this real estate was $337,500.
    The Pratt Street property consisted of a regular plot of ground, with a frontage of 25¾ feet on Pratt Street and an average depth of approximately 100 feet. This property was acquired by the decedent in 1898 at a cost of $20,000. At that time an old building was located on the property. This was torn down soon after its purchase by the decedent and the lot was improved by a five-story brick building which cost $18,000 to erect. This building was on the property in 1923. The ground floor was rented for stores and the upiper floors were rented as apartments. The gross rentals from the property in 1923 were $9,300, and the expenses were $3,708.43. The assessed valuation at date of decedent’s death was $77,500. This property was appraised for the purpose of the succession tax of the State of Connecticut by one Gaffey, appointed by the Court of Probate, at $110,000, and this appraisal was approved and accepted by the court by its decree dated October 1, 1923.

      The Main Street property in which the decedent had an undivided one-half interest — the other one-half interest being owned by the executor — is known in business circles as Nos. 90-1 — 908 Main Street, and a part of the premises on Temple Street is numbered 41-45 Temple Street. The plot of ground has a frontage of about 45 y2 feet on Main Street but tapers down to about 38 feet on the inner side, and it runs along Temple Street about 243 feet. On it there is a six-story brick building which was erected in 1893 at a cost of $120,000. In 1910 the entire property was purchased by the decedent and his brother, the executor of his estate, at a cost of $325,000, each brother thereby acquiring an undivided one half interest therein. The building is not modern; the plumbing is old, and in 1923 required frequent repairs; the walls are old and thin, and the cost of repairs to the building is large. The property was assessed by the city at the date of the death of the decedent at $528,000. An appraisal made after decedent’s death by the Court of Probate, for the purpose of the Connecticut State succession or inheritance tax, placed the valuation at $610,000, and that of the decedent’s one-half interest therein at $305,0p0. This valuation was approved and accepted by the court by its decree dated October 1, 1923. The gross rentals from the property for 1923 were $39,756, and expenses were $27,916.45, which included the cost of elevator service, janitor service, taxes, heat, water, and lights in the hall. At the date of the death of the decedent the value of the decedent’s interest in the Pratt Street property was $110,000, and the value of his one-half interest in the Main Street property was $305,000.
   OPINION.

Smith

: This appeal presents three questions for the determination of the Board: (1) Whether the Board has jurisdiction of this appeal in view of the fact that the appeal is filed in the name of “ Estate of Charles Dillon, Edward H. Dillon, Executor ”; (2) the value of real property located at 69-71 Pratt Street, Hartford, Conn., at April 24,1923; (3) the value of real property located at the corner of Main and Temple Streets, in Hartford, Conn., at the same date.

It is the contention of the Commissioner that the taxpayer is “ Edward H. Dillon, as Executor of the Estate of Charles Dillon,” and that the proper party to appeal is the executor and not the estate. With this contention we agree. But it appears to us that it is the executor who has made this appeal. The Board has jurisdiction to entertain it.

With respect to the value of the Pratt Street property at the date of the death of the decedent, April 24,1923, it is to be noted that this property was appraised by an appraiser, duly appointed by the Court of Probate for Hartford, Conn., for the purpose of the Connecticut State succession tax, at $110,000. In proof of this value the taxpayer has presented the depositions of six real estate men of the City of Hartford, all of whom appear to be well qualified to express an opinion as to the value of the real estate in question. Their estimates of value run from $103,000 to $111,160. The Commissioner has submitted no evidence in support of his determination of a value of $125,000 for the property.

The appraised value of the Main Street property accepted and adopted by the court of probate was $610,000. The decedent’s one-half interest therein was $305,000. The same real estate experts of the City of Hartford have placed estimates upon the value of this property ranging from $591,000 to $611,621. In support of the Commissioner’s valuation of $337,500 for the decedent’s one-half interest, the Commissioner has presented the deposition of John M. Brady, who testified that in his opinion the property was worth close to $1,000,000 in 1923. He testified that his profession was “real estate.” Asked if he had handled much real estate in the business section of Hartford — that is, bought and sold much of it— he replied, “ I have not; no.” “ Q. Have you acted as broker % ” “A. Never sold any right here in the center, never have bought any, but I had some experience with that building some years ago.” He then testified that a man unknown to him in 1915 and claiming that he represented a Mrs. Kresse or Mrs. Kresge had made an offer for the premises and business of the Dillon Co. of $750,000, of which amount $250,000 was for the business, the tangible assets of which were approximately $75,000. Brady testified that the decedent refused to sell the property for $750,000. Brady did not know the name of the person who made him the offer and the offer was not in writing. Although apparently the Commissioner’s determination of a value of $675,000 for the property at the date of the death of the decedent was predicated upon a valuation made by Brady, we are of the opinion that Brady’s estimate of value is entitled to little weight. It appears to us that the preponderance of evidence shows a value of the property on April 24, 1923, of not more than $610,000 and that the decedent’s one-half interest was worth not more than $305,000.

Order of redetermination will be entered on 10 days’ notice, under Rule 50.


author: MoRRis:

text:
    Appeal of WILSON E. SCHMICK.
    Docket No. 1971.
    Submitted May 15, 1925.
    Decided April 1, 1926.
    Gain realized by a stockholder upon the liquidation of the corporation, determined.

      Andrew T. Smith and Virgil T. Moore, Esqs., for the taxpayer1.

      Ellis W. Manning, Esq., for the Commissioner.

      Before Ivins, Love, and MorRis.
    This appeal is from a determination of a deficiency in income tax for the year 1918 of $49,601.07. The question involved is the gain realized by the taxpayer upon the liquidation of a corporation in which he was the sole stockholder.
    FINDINGS OF FACT.
    The taxpayer, a resident of Hamburg, Pa., was engaged in business as an individual in the manufacturing of brooms from 1894 to 1918.
    Prior to incorporating the business in 1913 the taxpayer constructed a new building in which to conduct future operations. In the construction of this building the taxpayer was actuated by two motives: (1) The erection of a building adequate for all the needs of the business, and (2) the erection of a building which would stand as a monument to his success and attainments in the broom business. The new building had an area of 218 feet by 60 feet, stood on a sandstone base, was finished in Indiana limestone trim, and in one outer corner of the building a corner stone was placed bearing the inscription “Erected by Wilson E. Schmick 1911-12.” The old building in which the business had theretofore been conducted was adequate to the needs of the business, and the efficiency of the operations conducted therein was not exceeded in the new building.
    In 1913, the taxpayer organized a corporation under the name of the Hamburg Broom Works, and on October 17, 1913, transferred all of the assets, including the good will, of his broom business to the corporation, and received therefor all of the capital stock of the latter, comprising 1,500 shares of common stock of the par value of $100 each — a total par value for all the stock so issued of $150,000. In addition to this stock consideration, the corporation obligated itself to assume the liabilities of business indebtedness of the taxpayer under the following resolution:

      Resolved, That as a further consideration of said transfer, this company hereby agrees to assume and pay all the liabilities of business indebtedness of the said Wilson E. Schmick connected with said broom business, and to hold him harmless by reason of any such indebtedness.
    Upon taking over the assets and business of the taxpayer, the Hamburg Broom Works determined a net worth in tangible assets of $131,140.01, and so recorded them upon its books of account. The difference between this value of the tangible assets and the par value of the capital stock issued to the taxpayer, to wit, $18,859.99, was charged to good will to balance the accounts.
    -Further charges were made to the good-will account on the books of the Hamburg Broom Works on the dates and in the amounts set out below:

      January 31, 1914_$1, 000. 00
    December 24, 1914_ 23, 692. 57
    December 31, 1915- 1, 900.00
    Total_ 26, 592. 57
    Thus the total charges against the good-will account on the books of the Hamburg Broom Works amounted to $45,452.56. In 1917 the entire account was charged off on the books against surplus.
    On August 1, 1918, the Hamburg Broom Works discounted its own note in the amount of $9,000, due four months from date, with the People’s National Bank of Waterville, Me. Because of the pending dissolution of the company, the bank, on September 30, 1918, drew a draft in the sum of $8,925, the balance due on the note, which was accepted and paid by the company on the same date.
    Just prior to the dissolution of the Hamburg Broom Works in 1918, taxpayer acquired 50 shares of the capital stock of that company from one Oberholtzer, and 50 additional shares from one Hess, for a total cash consideration of $10,500. Both of these individuals had been employed by the Hamburg Broom Works throughout the whole period of its existence. Oberholtzer was- employed in the executive capacity of secretary and treasurer, while Hess, in addition to his duties as factory superintendent, was a director of the company. Both of these individuals were aware of the taxpayer’s intention, at the time they parted with their shares of stock, to liquidate and dissolve the Hamburg Broom Works. Neither individual was under any obligation to the taxpayer at the time of these sales of stock to the latter, and the cash consideration paid by the taxpayer for these shares of stock constituted the entire purchase consideration.
    On September 30,1918, the Hamburg Broom Works was placed in process of dissolution, through the distribution on that date of its entire assets to the taxpayer, who was then the sole stockholder. The balance sheet of the corporation on that date, as adjusted by the Commissioner, exhibited the following assets and liabilities:
    ASSETS.
    Accounts receivable-$50, 357. 35
    Notes receivable_ 500.00
    Inventories_ 116, 232. 00
    Loans and advances to officers_ 18,151. 71
    Eeal estate_ 5, 000. 00
    Buildings_ 65, 211. 96
    Machinery_ 14, 277. 85
    Automobiles_ 5, 782. 20
    Office furniture and fixtures- 1, 637.11
    Insurance_ 325.00
    Total_ 277, 675.18

      LIABILITIES.
    Notes payable_$21, 642. 22
    Accounts payable- 23, 460. 35
    . Mortgage- 3,500.00
    Cash (overdrawn)__•_ 7,918.16
    Reserve for depreciation_ 8,551.12
    Capital stock_ 150, 000. 00
    Surplus- 62, 608. 33
    Total_ 277,675.18
    The taxpayer assumed all of the outstanding obligations of tin Hamburg Broom Works at the date of dissolution, as shown by tin above balance sheet, and in addition thereto that company’s liability for income and profits taxes for the nine-month period ended "September 30, 1918, in the amount of $47,178.42.
    From the very outset, after the distribution to him of the assets of the Hamburg Broom Works, the taxpayer, desiring to retire fron business, made very determined but unsuccessful efforts to dispose of the assets so received as a going concern. Advertisements, carrying offers to sell the business and assets, were inserted in trade papers; offers to sell were made to individuals whom it was though) might be interested; delegates attending broomcorn conventions and broom manufacturers’ conventions were put on notice that the business as a going concern was on the market for sale; and the taxpayer enlisted the services of one Unger, a public accountant who periodically examined the books of the business, and one Cox a broomcorn salesman, to assist him in disposing of the business No offers to purchase the business as a going concern were evei received.
    From September 30, 1918, until in or about the year 1923, the taxpayer continued to operate the business as a sole proprietorship. In 1921 the taxpayer began to dispose of the assets piecemeal, when on June 14 of that year, by agreement of sale, he disposed of the land and buildings, both the new one constructed in 1911-12 and the old building theretofore utilized, to three individuals engaged in the manufacture of knitted underwear, for a cash consideration of $50,000, which was payable in three installments on dates all within the calendar year 1921. The agreement of sale contained a provision under which the purchasers were to pay to the taxpayer a further sum of $5,000 in consideration of the removal of the broom factory equipment and business from the main building, and a further provision for the leasing of the old building to the taxpayer, for a term of five years, at a stipulated rental of $50 per month. A further provision was contained in the sale agreement in terms as follows:

      And the parties of the second part further agree that the tablet stone placed in the corner of the building with the inscription “ Erected by Wilson E. Schmick, 1911-12” shall be preserved unchanged as long as the building stands.
    The remaining assets of the business were sold in 1923 to a banking syndicate of Philadelphia.
    Prior to the organization of the Hamburg Broom Works the taxpayer was also the principal stockholder and an executive officer of the Schmick Handle & Lumber Co. The latter company was engaged principally in manufacturing and furnishing broom handles to the taxpayer and later to the Hamburg Broom Works. In the summer of 1913 he entered into a contract tyith the Hollingsworth & Whitney Co. under which he agreed to purchase a quantity of logs from the latter company. After the logs were cut, but prior to delivery, the Schmick Handle & Lumber Co. went into bankruptcy. Suit was instituted against the taxpayer in one of the courts of Maine by the Hollingsworth & Whitney Co. to enforce his liability on the contract, but the court held that he had signed the contract for a disclosed principal, which was the.Schmick Handle & Lumber Co., and that, in his capacity as agent, he was not liable under the contract. Subsequently, in July, 1918, an action was brought in the District Court of the United States for the Eastern District of Pennsylvania against the taxpayer by the Hollingsworth & Whitney Co., based upon this contract. On November 14, 1923, a jury returned a verdict for the plaintiff and assessed damages in the amount of $15,000. The taxpayer satisfied the judgment on November 16, 1923, by payment in cash of the full amount thereof. In addition thereto, he paid attorneys’ fees, during the years 1920, 1922, and 1923, for services in connection with that litigation, in the total amount of $7,115.
    Upon audit of the return of this taxpayer for the calendar year 1918, the Commissioner determined that, upon the distribution of the assets of the Hamburg Broom Works, the taxpayer had realized a taxable gain of $11,856.47. Such determination was predicated upon the following computation:
    Total value of stock on Sept. 30, 1918_$258, 055. 89
    Less unpaid income and profits taxes_ 47, 778.42
    Net assets received_ 210,277.47
    Cost to taxpayer of 1,500 shares of stock_ 132,421.00
    Liquidating dividend_ 77, 856.47
    To. the net income as reported in his return, for 1918 the Commissioner has added the sum of $71,856.47, as the gain realized by the taxpayer upon the exchange of his stock in the Hamburg Broom Works for the assets of that company, and the deficiency determination is predicated in part upon such action.

      The total value of the assets received in liquidation on Septem her 30, 1918, as included in the Commissioner’s computation se out above, represents the book value of the assets as disclosed by th< balance sheet of the Hamburg Broom Works of even date, as ad justed by the Commissioner, to which the Commissioner has addec the sum of $45,452.56, being the amount of the good-will accoun written off against surplus in 1917, and deducted the outstanding liabilities as disclosed by the same balance sheet.
    The cost to the taxpayer of the 1,500 shares of stock exchangee in 1918 for the assets of the Hamburg Broom Works was $132,421
   OriNION.

MoRRis:

This appeal presents for our consideration the question a to the amount of the gain, if anjq realized by this taxpayer upoi the liquidation of the Hamburg Broom Works, through which th taxpayer received the entire assets of that company in exchange fo: the capital stock owned by him and upon his assuming the outstand ing obligations of the company. The provisions of section 202 (b' of the Revenue Act of 1918 are applicable to the transaction, and thij involves a determination of the fair market value, if any, of th property received by the taxpayer in exchange for his stock, fo: only to the extent that such fair market value exceeds the cost of th stock to the taxpayer can the latter be said to have realized a taxabl gain upon the exchange.

As pointed out in our findings of fact, the Commissioner, basing his determination upon a corrected balance sheet of the Hamburg Broom Works as of the date of liquidation, has determined that th taxpayer received in exchange for stock, which he had acquired at ¡ cost of $132,421, the assets of the dissolved corporation having a ne fair market value of $210,277.47, and that thereby the taxpaye realized a taxable gain of $77,856.47.

On the other hand, the taxpayer contends (1) that the propertie received in liquidation had no fair market value, within the meaninj of section 202 (b) of the Revenue Act of 1918; (2) that, if th properties so received can be said to have had a fair market value, a the date received by the taxpayer, then book values are not a criterio: thereof; (3) that the fair market value, if any, of the propertie received in liquidation was not in excess of $157,500; and (4) that is any event the fair market value of the properties received in liquida tion, as established by the Commissioner, should be reduced by th amount included therein as the value of the good will, also by th amount necessary to reduce the real property value included thereis to an amount which would be more commensurate with the prope value, also by the total amount of certain liabilities of the Hamburj Broom Works not reflected in the balance sheet of September 30, 1918, nor on the books, which were assumed and paid by the taxpayer.

With the first contention of the taxpayer we feel constrained to disagree. While it may be true to a large extent, and the evidence convinces us that such is the fact, that at September 30,1918, and for an extended period of time thereafter, there was no market in which a corn-broom manufacturing business might be disposed of as a going-concern, nevertheless this is not conclusive proof that the individual assets comprising the plant equipment, real property, stock in trade, raw materials, and accounts receivable had no fair market value. In fact, the preponderance of evidence of record indicates that the plant equipment, real property, stock in trade, and raw materials had a fair market value at the date of distribution, though, in the case of the real property, less than that at which it was carried on the books of the liquidating company. And, with respect to the accounts receivable, it could hardly be said that this asset was without a fair value. At least there is no evidence before us to justify such a conclusion.

With respect to the second contention of the taxpayer, considerable merit is lodged therein, but the principle must necessarily be limited in its application to those instances wherein the proof is ample to demonstrate that book values do not reflect fair market values at the basic date. In the present case the evidence is such as to convince us that the fair market value of the land and buildings received by the taxpayer in liquidation was considerably less than the value at which those assets were carried on the books of the Hamburg Broom Works, 'a fact which' will be given more detailed consideration later on in this opinion. On the other hand, the evidence presented as to the fair market value of the other assets received in liquidation is insufficient to convince us that such value was less than the combined book values of those assets.

The taxpayer’s third contention, that the fair market value, if any, of the properties received in liquidation was not in excess of $157,-500, is based upon the proposition that the amount paid by the taxpayer to Oberholtzer and Hess, to wit, $10,500 for 100 shares of the capital stock of the Hamburg Broom Works, just prior to the liquidation of that company, fixes a value for all the stock of that company and by the same token evidences the maximum fair market value of the assets of that company at the date of distribution.

The stock transaction referred to above involved the purchase and sale of but 100 shares, or one-fifteenth of the entire outstanding capital stock of the Hamburg Broom Works. Ordinarily, we would regard the evidence of such transactions as of little consequence when standing alone. However, when we consider the circumstances surrounding the transactions, through which the taxpayer acquired these shares of stock, in conjunction with other record evidence pertaining to the value of the assets at the date of distribution, we feel convinced that the transactions have considerable weight in establishing the fair market values of the assets received by the taxpayer in liquidation.

As pointed out in our findings of fact, both Oberholtzer and Hess had been employed by the Hamburg Broom Works throughout the period of its coi'porate existence. Oberholtzer, in his capacity as secretary and treasurer, had an intimate knowledge of the financial condition of the company, as reflected by its books of account, while Hess, through his long association with the company in the capacity of factory superintendent and director, was in a position to know full well the results of the operations of the business. By virtue of these circumstances, both of these individuals knew the value of their stockholdings in the Hamburg Broom Works. Neither was under any obligation whatever to the taxpayer. Both knew, when they parted with their stock, of the taxpayer’s intention to dissolve and liquidate the corporation. If either or both had felt that the purchase price Avas not reasonably equiAralent to the full fair value of their stock, they could have elected to await the liquidation of the company, a matter of 30 days hence, to receive their distributive share in the assets of the company. The transactions were conducted at arm’s length. When we are confronted with circumstances such as these, we are inclined to ascribe to such transactions considerable weight as evidence of the value of the assets, where the value so indicated is supported by other corroborative evidence.

The fourth- contention of the taxpayer is severable into four parts, all of which suggest reasons for a revision downward of the Commissioner’s determination of the fair market value of the assets received by the taxpayer in liquidation. The Commissioner determined said value to be $210,277.47, which represents the net book value of the assets, as shown by the balance sheet set out in our findings of fact, plus good will in the amount of $45,452.56, less income and profits taxes of the company for the nine-month period ended September 30, 1918, in the amount of $47,778.42, which were assumed and paid by the. taxpayer. The contention takes up first the propriety of the Commissioner’s action, in increasing the book value of the assets, for the purpose of the determination, by an alleged good will value of $45,452.56.

The story as to how the good will account was arbitrarily written on the books of the Hamburg Broom Works, and as arbitrarily charged off against surplus in the year 1917, is set out in our findings of fact. There we related that the par value'of the capital stock issued to Schmick in 1913 for the assets of his broom business ivas $18,859.99 in excess of the value of. the tangible assets, the excess being charged to good will account as a mere balancing mtry, and later, during the years 1914, 1915, and 1916, further charges were made to this account in the total amount of $26,592.57, cringing the account up to the total sum of $45,452.56. The entire recount was charged off against surplus, as worthless, in 1917. The evidence is not at all clear, but rather confusing, as to the nature cf the charges made to the good will account in 1914, 1915, and 1916. But it is quite apparent that the good will account was used as a dumping ground, so to speak, for charges which the taxpayer was at a loss to know how to otherwise dispose of.

The facts in the case relating to the Commissioner’s determination take a peculiar turn. The Commissioner has held that the cost of the original stock to the taxpayer should be based upon the value of the tangible assets paid in to the company by the taxpayer in 1913. In so doing he disregards the arbitrary charge in 1913 to good will account, on the books of the Hamburg Broom Works in the amount of $18,859.99, as a mere balancing entry. Yet, for the purpose of determining the fair market value of the assets received by the taxpayer in liquidation, the Commissioner includes in his computation a value for good will measured by the sum of the balancing entry made to the good will account in 1913 plus the subsequent arbitrary charges to the same account. Had not these arbitrary charges to the good will account been made, the account would not have appeared upon the books at all; and the Commissioner, predicating his determination of the fair market value of the assets distributed in liquidation upon book values, would have disregarded the good will entirely, or would have resorted to other means to determine its fair market value, if any, when received by the taxpayer. As a matter of fact the Hamburg Broom Works, realizing the error of making these arbitrary charges to good will account and sensing the worthlessness of the account, had eliminated it from the books in 1917, so that no good will appeared in its accounts at the date of liquidation.

In view of the foregoing, we are convinced that the basis used by the Commissioner in his determination of the value of the good will, alleged to have been received by the taxpayer in liquidation of the Hamburg Broom Works, is erroneous, and that, by the same token, the Commissioner’s good will valuation of $45,452.56 is erroneous.

Passing on to the proposition as to the fair market value of the real property received in liquidation by the taxpayer, we find that the same was carried on the books of the Plamburg Broom Works at a value of $70,211.96, which the Commissioner adopted as the fair market value at the date of distribution. We are convinced from the evidence that the value was much less.

The real property in question consisted of the old building in which the taxpayer conducted his business prior to 1912, the new building which he constructed in 1911-12, and the land upon which these buildings stood. The cost of these properties, as shown by the balance sheet in our findings of fact, was $70,211.96, against which some part of the depreciation reserve applied. But viewed in the light of the proven facts in this case, we do not believe that the depreciated cost represented their fair market value at the date of distribution, and especially is this true with respect to the new building constructed in 1911-12.

On the witness stand the taxpayer and other witnesses testified as to the adequacy of the old building to meet the then and pro- j spective needs of the taxpayer’s business. They testified that the old j building was sufficient in capacity and stability to take care of the growing business, and that the efficiency of the operations conducted therein was never exceeded in the new building. These things are confirmed in a large measure by the fact that, after he sold the real property in 1921, the taxpayer removed his business to the old building, which he had secured under lease, and there conducted the operations of the business until he abandoned it in 1923.

But in the 20 years he had been engaged in the corn-broom manufacturing business prior to 1913, the taxpayer had met with considerable success. From an original plant assembled with $200 of borrowed money, by 1913 the plant had grown to be one of the largest engaged in the corn-broom industry. Proud of his achievements, the taxpayer conceived the idea of erecting a monument testifying to his success and attainments in the corn-broom business. To satisfy his vanity, as the taxpayer himself puts it, he constructed what he proposed should be “ the finest broom factory in the country.” The building was constructed upon a sandstone foundation, trimmed with Indiana limestone, and in a conspicuous place in the outer wall a corner stone was placed bearing the inscription “ Erected by Wilson E. Schmick 1911-12.” That the building-should be no less a monument to his pride and success after it passed from his possession, a provision was included in the sales agreement “ that the tablet stone placed in the corner of the building with the inscription ⅝ * * shall be preserved unchanged as long as the building stands.”

However, when the taxpayer sought to dispose of the building-through the years 1918 to 1921, he found no ready market for a manufacturing building of this character and type of construction, notwithstanding the taxpayer’s determined efforts to so dispose of it. Finally, in 1921, the real property, including this building, was sold to a concern engaged in the business of manufacturing knitted underwear, at a price of $50,000.

The witness Duvall testified .that for the past 20 years he has been engaged in the real estate brokerage business in the vicinity of Hamburg, Pa.; that he is at present assessor for Eeading County, in which county Hamburg is located; that for the past 20 years he has been employed by the Pennsylvania Trust Co. to appraise properties upon which mortgages were sought; that he has been employed from time to time by the Eeading Eailroad Co. to fix damages in the abolition of grade crossings; that he examined the real properties formerly owned by the Hamburg Broom Works; that the fair market value of such properties in 1918 was from $30,000 to $38,000; and that, between the years 1918 and 1921, there was a considerable increase in the value of real property in Hamburg and contiguous territory.

The taxpayer points out that the Commissioner, in his determination of the fair market value of the assets received in liquidation on the basis of book values, failed to take into consideration the liability of the Hamburg Broom Works to the People’s National Bank of Waterville, Me., in the sum of $8,925, on a note discounted with that bank on August 1, 1918, which liability was assumed and paid by the taxpayer.

The evidence on this proposition, however, shows conclusively that the bank, on September 30, 1918, drew a draft in the sum of $8,925 on the Hamburg Broom Works, which was accepted and paid the same day by that company; that the taxpayer did not assume this obligation; and that the liquidation of this note was given effect in the balance sheet of the Hamburg Broom Works of September 30, 1918, upon which the Commissioner relied as reflecting book values.

The taxpayer further points out that the Commissioner failed to take into consideration the payment of $15,000 made by the taxpayer to the Hollingsworth & Whitney Co. in 1923, in settlement of damages awarded against him in the same year, by a jury in the United States District Court for the Eastern District of Pennsylvania, in connection with a contract executed by the taxpayer in 1913 for the purchase of a quantity of logs from the Hollingsworth & Whitney Co., as well as the further sum of $7,TT5, representing attorneys’ fees paid during the years 1920, 1922, and 1923, in connection with this litigation. The taxpayer contends that these were obligations assumed by the Hamburg Broom Works when it took over his business in 1913. The evidence before us is not sufficient, however, to convince us that such is the fact.

The liabilities assumed by the Hamburg Broom Works in 1918, as a part consideration for the business of the taxpayer, were solely those representing his business indebtedness — the indebtedness incurred in carrying on his broom manufacturing business. What relation these obligations for damages awarded the Hollingsworth <& Whitney Co. and for attorneys’ fees bore to his broom manufacturing business has not been disclosed to us. On the record, we doubt that they were connected in any way with the business taken oyer by the Hamburg Broom Works in 1918.

The facts hereinabove pointed out with respect to the good will and real property values as of September 30, 1918, as determined by the Commissioner, show conclusively that the book values used by him in his computation of the taxpayer’s profit on this transaction ¿re considerably in excess of the fair market value of the assets received.

In the light of the facts, as we have found them to be, and in view of the reasons set out in this opinion, we believe that the fair market value of the assets received by the taxpayer in liquidation of the Hamburg Broom Works was not in excess of $157,500, and the computation of the gain should be made on this basis.

Order of redetermination will be entered on 10 days' notice, under Rule 50.


author: GeaupneR

text:
    Appeal of THE CARBON LIMESTONE CO.
    Docket No. 5216.
    Submitted November 24, 1925.
    Decided April 3, 1926.

      H. W. Feather for the taxpayer.

      Thomas P. Dudley, Jr., Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes, in the amount of $28,484.28, for the fiscal year ended March 31, 1919. A part of the deficiency arises from the refusal of the Commissioner to allow the deduction of certain items claimed by the taxpayer as expenses.
    FINDINGS OF FACT.
    The taxpayer is an Ohio corporation with its principal place of business at Youngstown, and is engaged in open-pit quarrying and selling limestone for blast furnaces and highway construction.
    In the fiscal year ended March 31, 1919, the taxpayer made expenditures as follows:

      Dodge roadster___ $1,160. 00
    18 dirt cars (new)- 3,364.15
    Frogs and switches_ 276. 00
    Woodworking machinery_ 425. 00
    Saw_ 359. 63
    Additions to storeroom_ 183. 46
    New drills_ 1, 556. 96
    Rehabilitation of electrical equipment_ 8,179. 98
    Total_ 15, 505.18
    The limestone in the taxpayer’s quarry is covered with an overburden of dirt and shale, varying from 14 to 42 feet in thickness, which is removed by means of steam shovels and industrial side-dump cars. About the time the new cars above listed were purchased the operations of the taxpayer reached a point where the overburden increased considerably and required hauling to a greater distance, so that the addition of the new cars became necessary in order to permit the taxpayer to maintain its normal production.
    The woodworking machinery and saw were purchased for the purpose of removing timber from land on which the taxpayer desired to conduct its operations. The machinery and saw were used about 10- or 11 months and then stored in the taxpayer’s warehouse, where they still remain. The average useful life of machinery of this kind is about two years.
    The purchase of new drills became necessary, due to increased thickness of the strata of the limestone, which necessitated more and closer borings in order to blast the rock.
    The item of rehabilitation of electrical equipment consists principally of the amount spent in the construction of a new power line for the operation of air compressors about 2 miles distant from the transformers. The new line was constructed through a part of the quarry not reached by the old line and was installed to prevent the delay occasioned by the moving of compressors to different locations in the quarry. Included in the construction of the new lines were poles, cables, cross arms, insulators, and lightning arresters. This equipment is still in use.
    The items above described did not serve to increase the taxpayer’s production, but were installed in order to maintain the normal production.
   OPINION.

GeaupneR

: The items of equipment described in the findings of fact are similar in character to those considered in the Appeal of Union, Collieries Co., 3 B. T. A. 540, are capital items and can not be deducted as expenses. See also Appeal of Simmons & Hammond Mfg. Co., 1 B. T. A. 803.

With respect to the other items listed in the findings of fact, no evidence was offered which would warrant us in disturbing the action of the Commissioner in holding that they are not deductible as expenses.

It is manifest that the entire amount of the deficiency does not arise from the disallowance of the above-listed items, but no issue was raised as to any other adjustments made by the Commissioner in the determination of the deficiency, and consequently we can not pass upon them in this appeal.

Order of redetermination will he entered on 15 days' notice, under ■Rule 50.


author: Phillips

text:
    Appeal of THE WARREN CO.
    Docket No. 4588.
    Submitted December 15, 1925.
    Decided April 3, 1926.
    The determination of the Commissioner disallowing, as a deduction for compensation for services rendered, additional amounts credited to officers of a corporation in December of the taxable year, the officers owning all of the stock and such additional credits being in) substantial accord with their stockholdings, approved in the absence of proof that such additional credits, together with the other compensation paid during the taxable year, constituted reasonable compensation for services rendered. Deduction allowed corporation, under such circumstances, in the case of one officer, upon proof that the amount credited to him did not exceed a reasonable compensation.

      Morris D. Kopple, Esq., for the taxpayer.

      George G. Witter, Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    Taxpayer appeals from the determination by the Commissioner-of a deficiency of $2,239.81 in income and profits taxes, alleging-that the taxes in controversy are income and profits taxes for the-calendar years 1920 and 1921. The deficiency letter asserts a deficiency for 1920 of $2,239.81 and no deficiency for 1921. Taxpayer-alleges that the Commissioner committed error in refusing to allow a deduction from gross income in the years 1920 and 1921 of $11,700, claimed by the taxpayer to be a part of the salary paid to its officers.
    FINDINGS OF FACT.
    The taxpayer is a Texas corporation with its principal office in-Houston. During 1920 and 1921 it was engaged in the plumbing-business in Houston and had an established reputation, having completed contracts for the plumbing work upon some of the larger- and most recently built office buildings in that city. It had the-f olio wing officers and directors: B. W. Warren, president and general manager; C. L. Warren, treasurer, construction superintendent, and assistant manager; and J. W. Phillips, vice president, secretary, and assistant general manager. All of these officers had several years’ experience in the business prior to the organization of the-taxpayer by them in 1914.

      B. W. Warren was in charge of securing business, having good business connections and being well known among architects and builders. He also did the buying for most of the large contracts. C. L. Warren supervised all construction work and did all of the estimating. Phillips was in charge of the office, secured estimates and prices upon materials, attended to some of the buying, and assisted in the management of the business. Each of the three devoted their entire time and long hours to the business.
    When the corporation was organized there was an understanding, which continued to the years here in question, that salaries of the officers would be based on what the company was able to pay. In 1919 the salaries paid the several officers were as follows: B. W. Warren, $6,000; C. L. Warren, $3,300; and Phillips, $3,000. During that year the corporation paid a cash dividend. On March 1, 1920, the directors, consisting of the three officers, passed a resolution “ to raise all salaries beginning with January 1, 1920.” No amount was fixed in the resolution. Salaries were credited on the books monthly during 1920 as follows: B. W. Warren, $800; C. L. Warren, $350; and Phillips, $300. In December, 1920, there were credited to their respective accounts the following additional amounts: B. W. Warren, $9,000; C. L. Warren, $1,200; and Phillips, $1,500. At that time C. L. Warren and Phillips had each overdrawn their accounts .to approximately the amounts so credited to them. Beginning on January 1, 1921, the officers were credited monthly with salaries as follows: B. W. Warren, $1,550; C. L. Warren, $450; and Phillips, $425.
    Upon its tax returns the taxpayer claimed the full amount of such credits to its officers as proper deductions for salaries. The Commissioner refused to allow as a deduction for 1920 the amount of $11,700, credited in December, 1920, and also reduced the amount claimed in 1921 by a like amount. During 1920 and 1921, 80 per cent of the stock of taxpayer was owned by B. W. Warren; 10 per cent by C. L. Warren; and 10 per cent by Phillips. The gross business of the taxpayer in 1920 was $208,549.06, which was more than double that of 1919, and in 1921 it was $198,634.52. The net income for 1919 was $6,320.25; for 1920, $35,582.89; and for 1921, $641.63, before the deduction of any part of the amounts in dispute in this appeal.
    In 1921 a stock dividend was declared, increasing the stock from a par value of $20,000 to $50,000. In 1922 salaries were reduced below the amounts credited in 1920 and 1921, and C. L. Warren left the employ of the taxpayer for a more lucrative position. Five thousand four hundred dollars was reasonable compensation for the services rendered to the corporation by C. L. Warren during 1920 and 1921.

      The return filed by the taxpayer for 1921 showed a loss of over $19,000 and no tax due. In the deficiency letter from which the appeal is taken the Commissioner determined the 1921 net income to be $641.63 and no tax to be due.
   OPINION.

Phillips

: For the year 1921 the taxpayer has paid no tax and the Commissioner has found no tax to be due and has asserted no deficiency. The deficiency for 1920 is not affected by the determination of the net income for 1921, and in these circumstances there is nothing-before the Board for its determination with reference to 1921. The appeal, so far as it relates to that year, must be dismissed.

During 1919 the taxpayer paid its officers salaries of $12,300. In 1920 it increased the monthly credits for salaries, and in this manner, during the year, credited its officers with $11,400 as salaries, which amount has been allowed as a deduction by the Commissioner. In December, 1920, it credited the accounts of its officers with the additional sum of $11,700, claimed by it to be additional salaries.. This amount was disallowed as a deduction by the Commissioner. It was divided between the officers substantially upon the basis of their stock ownership. No dividend was declared in 1920, although the taxpayer’s business was much more successful in that year than in 1919 when dividends had been declared. In such circumstances, we are not inclined to disturb the determination of the Commissioner without some convincing proof that the payments were reasonable compensation for the services rendered. No such proof has been furnished, except with respect to C. L. Warren. We are satisfied that the additional $1,200 credited to him in December, 1920, together with his other compensation, was reasonable compensation for the services he performed, and the net income for 1920, as computed by the Commissioner, should be reduced by $1,200.

Order dismissing the appeal as to the year 1921 and redetermining tax for 1920 will he entered on IB days’ notice, under Rule 50.


author: GkaupNek

text:
    Appeal of DUNKER & PERKINS CO.
    Docket No. 5607.
    Submitted February 11, 1926.
    Decided April 3, 1926.
    Under section 204 of the Revenue Act oí 1918, where the income for 1918 was sufficient to offset a net loss sustained in 1919, such loss may not be deducted from gross income for the year 1920.

      Frank J. Albus, Esq., for the taxpayer.

      J. W. Fisher, Esq., for the Commissioner.
    Before Gkaupnee and Teammell.
    This is an appeal from the determination of a deficiency in income and profits taxes in the amount of $1,584.97 for the calendar year 1920. The question involved is whether certain losses sustained in 1919 may be deducted in computing net income for 1920.
    FINDINGS OF FACT.
    The taxpayer is a Massachusetts corporation with its principal place of business at Boston.
    It was incorporated on May 1,1918, and since that date it has kept its books on a calendar year basis, its first taxable period having terminated on December 31, 1918.
    For the period May 1, 1918, to December 31, 1918, the taxpayer realized a taxable gain of $25,493.32. For the calendar year 1919 it sustained a loss of $10,394.11, of which $4,092.56 represents a loss on the sale of Liberty bonds, and the balance, $6,301.55, represents an operating loss of the business. For the calendar year 1920 the taxpayer realized a taxable gain of $13,276.75.
   OPINION.

GkaupNek

: The taxpayer claims the right, under section 204 of the Revenue Act of 1918, to a deduction for the year 1920 of the loss sustained for the year 1919. The terms of section 204 are specific in requiring the application of the losses therein defined, first to the preceding year, and to the succeeding year only in the event that there remains a net loss in excess of the net income for the preceding year. -In the case here under consideration, there was a taxable gain in 1918 in an amount more than sufficient to absorb the entire less sustained in 1919. Consequently, if section 204 were properly applied to the years 1918 and 1919, there would remain no loss to be deducted from 1920 income. Whether or not the Commissioner did permit the application of the 1919 loss to the 1918 income is not before us for determination.

The deficiency is $l,58fi.97. Order toill he entered accordingly.


text:
    Appeal of EVERETT S. LAIN.
    Docket No. 5968.
    Submitted January 13, 1926.
    Decided April 3, 1926.

      W. Frank Oibhs, Esq., for the Commissioner.
    Before GkaupNER and TRAmmell.
    This is an appeal from the determination of a deficiency in income tax for the calendar year 1921 in the amount of $69.13. ' The error alleged is the refusal of the Commissioner to allow the deduction of claimed business expenses by the partnership of which the taxpayer is a member.
   FINDINGS OF FACT.

The taxpayer is a physician residing at Oklahoma City, Okla., and is a member of the partnership of Lain & Roland, who are engaged in the practice of medicine, specializing in the treatment of cancers and skin diseases.

The partnership to a large extent secures its patients through acquaintances in the medical profession who are general practitioners •or specialists in other lines of medicine, and who send to the partnership patients in need of the particular kind of service that the partnership renders. Such acquaintances in the profession are made by the partners by attending meetings and conventions of medical societies.

The taxpayer and his partner attended medical conventions in 1920 and 1921.

The deficiency is $69.IS. Order will be entered accordingly.


author: Phillips:

text:
    Appeal of GEORGE W. BURKITT ESTATE.
    Docket No. 2038.
    Submitted November 1, 1925.
    Decided April 3, 1926.
    Where the one-half interest of the wife in community property descended to her children, who conveyed it to the husband of the decedent for the purpose of facilitating the administration of the estate, held, that property identified as forming part of the wife’s estate, and the proceeds of so much as had been realized upon, was no part of the estate of the husband, who died within a year after the death of the wife.

      James J. O'1 By me, Esq., for the taxpayer.

      J. G. Swayze, Esq., for the Commissioner.
    Before Graupner and Phillips.
    This is an appeal from the determination by the Commissioner of a deficiency of $6,860.69 in estate tax.. The amended answer alleges error and seeks to increase the deficiency to an amount in excess of $10,000.
    FINDINGS OF.FACT.
    1. George W. Burkitt, Sr., the decedent, died July 14, 1923.. His wife, Mary E. Burkitt, died July 4, 1922. Both were residents of Texas. An estate-tax return was filed on behalf of the estate of Mary E. Burkitt and the tax was paid.
    2. Several years prior to his death the decedent had retired from active business and was engaged in handling the various properties, that he had accumulated, selling land that he had bought for timber, cutting off the timber, and selling the cut-over lands. Much of this was sold for part cash and part notes.

      3. The estate of Mary E. Burkitt consisted almost entirely of a one-half interest in the community property held by herself and her husband at her death. At the time of her death, the community property consisted of 54 separate pieces of real estate; 10 separate items of stocks and bonds; over 500 notes receivable owing by 123 persons; and undivided interests in 25 other pieces of real estate in which the community had a joint ownership. The gross estate of Mary E. Burkitt, as determined by the Commissioner, was $352,-401.52, which, after legal-deductions, including the $50,000 exemption, left a net taxable estate of $295,948.40.
    4. Upon the death of Mary E. Burkitt, intestate, her estate, including her one-half interest in the community property, descended, under the law of Texas, to her two children, George W. Burkitt, Jr., and Elizabeth B. Crane.
    5. Three or four days after the death of Mrs. Burkitt, her husband, George W. Burkitt, Sr., consulted his attorney with reference to the simplest and easiest way to administer Jiis wife’s estate. The attorney suggested that the easiest, and most convenient, and least expensive way, a way that would save administration and other legal procedure, would be for the children, George W. Burkitt, Jr., and Elizabeth B. Crane, to deed the property to Burkitt, Sr.
    6. For about a year previous to his mother’s death, George W. Burkitt, Jr., had been ill, and at the time of her death he was at a sanitarium at Wauwatosa, Wis. Under date of August 1, 1922, he received a letter from his father, the material portions of which were as follows:
    Inclosed find a deed for your signature that is meant to avoid unnecessary expense in handling your mother’s interest in the property. She left no will, and to administrate on the property would entail an unnecessary expense and a long drawn out series of red tape proceedings.
    Sign and acknowledge the deed and return to me at your earliest convenience.
    7. The deed referred to in the above letter, and inclosed therewith, which was executed by George W. Burkitt, Jr., was a warranty deed, and purported to convey to George W. Burkitt, Sr., all the interest of George W. Burkitt, Jr., in the property which had come to him from his mother, Mary E. Burkitt, deceased. The consideration expressed in the deed is $1 and “ natural love and affection.” George W. Burkitt, Jr., did not return to Houston until about two months after the execution of the deed.
    8. The value of the share of George W. Burkitt, Jr., in his mother’s estate was in excess of $150,000. His total net worth, aside from his interest in his mother’s property at the time of the signing of the deed above referred to, was not over $6,000. He received nothing of value from bis father for transferring to him his interest in his mother’s estate.
    9. Elizabeth B. Crane, the other heir of Mary E. Burkitt, on the 31st day of July, 1922, executed a warranty deed to her father, purporting to convey to him her interest in the estate of her deceased mother. This deed also recited a consideration of $1 and “ natural love and affection.”
    10. Mrs. Crane was requested by her father to execute this deed, and he stated that he desired her to do so in order to permit him a greater facility in handling his wife’s estate and to relieve his daughter, Mrs. Crane, of any trouble or worry, to keep down the expenses of administration as much as possible, and to eliminate any red tape that might have to be gone through with in the administration of it.
    11. The value of Mrs. Crane’s interest in her mother’s estate at the time of the execution pf the deed was in excess of $150,000. Her net worth at that time, aside from her interest in her mother’s estate, was not more than $5,000.
    12. At the time of these transfers, George W. Burkitt, Sr., was 72 years of age, active, and in good health. He died about a year afterwards, leaving his entire estate, with the exception of one or two small bequests, to his two children, share and share alike.
    13. In conversations with his attorney, his daughter, and with his bookkeeper and secretary, he spoke of the property which his children had deeded to him as their half of the property and the remainder of the property as his.
    14. George W. Burkitt, Sr., managed the property formerly held in community, including Mrs. Burkitt’s interest which the children conveyed to him, up to the time of his death, July 14, 1923.
    15. In the return filed on behalf of thG estate of George W. Burkitt, Sr., the value of the property so acquired, or acquired through the conversion thereof, was included in his gross estate, and deduction was claimed under section 403 (a) (2) of the Bevenue Act of 1921 in an amount approximately equal to the value of such property, as representing property previously taxed in the prior decedent’s estate. The return was so made acting upon advice of a deputy collector of internal revenue, which advice was confirmed by an internal revenue agent.
    16. In computing the deficiency of $6,860.69, the Commissioner included as part of the gross estate of George W. Burkitt, Sr., over $295,000 for property identified ás having formed a part of the estate of Mary E. Burkitt, and allowed as a deduction, as property previously taxed, $210,852.17. During his lifetime George W. Burkitt, Sr., collected over $51,539.03 from the assets of the estate of Mary E. Burkitt, which was invested by him in property which formed a part of his gross estate as determined by the Commissioner.
    17. The Commissioner determined the gross estate of George W. Burkitt, Sr., to be $742,886.61, the net estate to be $494,315.35, and the deficiency in tax to be $6,860.69. The executor of the estate appealed, alleging that the Commissioner erred (1) in refusing to permit as deductions those sums which had been collected by George W. Burkitt, Sr., from the property of Mary E. Burkitt and reinvested, and (2) in allowing as a deduction on account of property received from the estate of Mary E. Burkitt only so much as is in excess of the funeral expenses, debts, and expenses of administration of George W. Burkitt, Sr., and his estate. In his answer the Commissioner alleges error in allowing any deduction for property of the estate of Mary E. Burkitt received by decedent, and asks that the deficiency be increased accordingly.
   OPINION.

Phillips:

Mary E. Burkitt predeceased her husband, George W. Burkitt, Sr., the decedent whose estate is the appellant in this matter, by about a year. Her estate consisted almost wholly of her community interest in the property accumulated by her and her husband, which comprised 54 parcels of real estate, in which they owned the entire title, and 25 parcels, in which they had a joint interest with others, several items of stocks and bonds, and over 500 notes owing from some 123 persons, many of these notes being payable in installments. Under the laws of Texas the wife’s community interest in the property passed to her two children. In order to facilitate the management and sale of the real estate and collection of the notes, the husband procured deeds from the two children conveying to him their entire interest in the wife’s estate.

About a year after such conveyances were executed George W. Burkitt, Sr., died. His executor was advised by a deputy collector of internal revenue, and later by an internal revenue agent, that the proper manner of making the Federal estate-tax return was to include in the gross estate all the property to which decedent had the legal title, including that of his wife conveyed to .him by his two children, and to claim such property as a deduction, under section 403 (a) (2) of the Revenue Act of 1921, as property which formed a part of the gross estate of a person who died within five years of the death of the decedent. This was done, and the Commissioner, assuming that the property was received by the decedent directly from the wife, allowed as a' deduction a portion of the value of the property which had formed the wife’s estate. The executor of the decedent’s estate filed this appeal, claiming that a greater deduction should have been allowed.

The Commissioner filed an answer alleging that he was in error in allowing any deduction from the gross estate for property taxed as part of the estate of Mary E. Burkitt, and asking that the deficiency be increased accordingly. The taxpayer filed a reply alleging that no part of the property received by decedent from his children should have been included in the gross estate.

Two questions are presented, viz: (1) Did the property of the wife, received by the decedent from his two children, become his property so as to be a part of his gross estate; and (2) if so, how much of such property has been included in the gross estate of the decedent ?

We think there can be no doubt that, in the circumstances shown by the evidence, the beneficial interest in the property of Mary E. Burkitt remained in her children, and that the legal title was vested in the decedent only as a convenient method of managing the property. There were many parcels of real estate on which rents were being collected and timber removed and sold. There were over 500 notes, many of which were payable in installments. Contracts for the sale of property on the installment basis were outstanding. The son was at a sanitarium. Administration on the personal property might easily have been obtained and carried out, but in the sale of the real estate and in the sale of standing timber and conveyances under outstanding contracts of sale the signatures and acknowledgments of the father, son, daughter, and her husband would always have been required. The father was justified when he said in his letter to his son that “to administer on the property would entail an unnecessary expense and a long-drawn-out series of red-tape proceedings.”

The letter from the father to the son, inclosing the deed for execution, was the only communication between them with reference to the conveyance which was executed. It asks that the deed be executed, not because the father claims or wishes to claim or to receive any interest in the mother’s estate but because it “is meant to avoid unnecessary expense in handling your mother’s interest in the property.” There was no consideration given. The father was worth at least $350,000 and the son, except for his interest in his mother’s estate, about $6,000. Substantially, the same representations were made to the daughter as the reason for the execution of a similar deed by her of her interest in her mother’s property. In subsequent conversations the decedent spoke of his half of the property and his children’s half. Under such circumstances we believe that the legal title to the property passed to the decedent for the purpose mentioned by him, viz, to administer it, creating a trust, and that he was at all times subject to account to the children. The decedent died within a year after these conveyances were made and while only a very small part of the whole estate had been collected. These collections were invested by the decedent in the construction of a hotel, a project which he and his wife had started prior to her death. It is our conclusion that the property which has been identified as having been conveyed to the decedent by his children and the proceeds of such part of that property as was sold by him form no part of the gross estate of the decedent.

The record is not entirely clear as to what is the amount by which the gross estate of the decedent has been increased due to the inclusion of such property. The Commissioner’s deficiency letter does not state the amount and the pleadings do not help materially. It is clear, however, that property which has been identified as having come to the decedent from the children and which formed a part of the estate of the wife has been included in the gross estate of decedent at a value of over $295,000, and that there has also been included in the gross estate over $51,359.03 collected during his lifetime and invested in the hotel property. The gross estate should be reduced by these amounts, with any necessary corrections to arrive at the correct amounts, and the deficiency, if any, computed accordingly.

Order of redetermination will be entered on W days’ notice, under Rule 50.