author: Smith

text:
    Appeal of JAMES R. LISTER.
    Docket No. 3411.
    Submitted June 23, 1925.
    Decided January 28, 1926.
    Under date of September 30, 1916, the taxpayer entered into a contract with John P. Walworth and Charles W. Walworth by which he obligated himself to work for the corporation of Wal-worth Brothers, Inc., for a period of three years from the date of the contract at a salary of $100 per week, provided that he would receive at the end of three years 500 shares of the common stock of the corporation, such 500 shares having been issued to and being owned by the two Wal worths. For this contract another was substituted, dated September 30, 1917, which provided that the 500 shares of stock in question should be loaned by the owners to Walworth Brothers, Inc., and that there should be credited upon the books of the corporation at the end of each six months one-sixth of the par value of the 500 shares of the stock to be given to the taxpayer. The contract was not carried out according to its terms, but stock was actually transferred some time after the expiration of each year. Held,, that the taxpayer received income in the year 1919, to the extent of the fair market value of the shares of stock received by him in 1919.

      Herbert A. Bice, Esq., for the taxpayer.

      F. O. Grmes and Arthur H. Murray, Esqs., for the Commissioner.
    Before James, LittletoN, Smith, and Trttssell.
    This appeal is from the determination of a deficiency in income tax for the year 1919 in the amount of $9,386.42, against which there has been a determination of an overassessment of tax for the year 1918 of $3,349.47, and against which the taxpayer alleges an overpayment of tax for the year 1917 of $2,516.64.
    FINDINGS OF FACT.
    The taxpayer is a resident of Clinton, Mass. In 1904 he went to work for Walworth Brothers, a partnership, engaged in the manufacture of woolen goods at Lawrence, Mass., as a designer at a salary of $25 per week. His salary was gradually increased until, in 1916, he was receiving a salary of $92 per week. He had frequently asked for increases in salary and on different occasions was told by his employers that if he would bide his time he would come out all right. In August or September, 1916, the business, which at the time had book assets of approximately $400,000, was incorporated with a capital stock of $1,000,000, divided into 1,000 shares of 7 per cent first preferred stock, 4,000 shares of 7 per cent second preferred stock, and 5,000 shares of common stock, each share having a par value of $100. At the time of incorporation, Walworth Brothers, the'partnership, had in their employ certain employees who had been with, them for many years and to whom they proposed to give and did give shares of common stock in the corporation. Two of those employees were the taxpayer and one Henry Finegold. On or about September 30, 1916, the taxpayer was given a certificate for 500 shares of common stock of the newly organized corporation, which he endorsed in blank and turned over to the Walworth brothers in accordance with an agreement which reads in full as follows:
    Ageeement, made this thirtieth day of September, 1916, between John P. Walworth and Charles W. Walworth of Lawrence, Mass., parties of the first part, and James R. Lister, of said Lawrence, party of the second part,
    WITNESSETH :
    Whereas, the co-partnership of Walworth Brothers has been dissolved and there has been formed therefrom a corporation known as Walworth Bros. Incorporated, with a capital stock of one million dollars, divided into one thousand shares of First Preferred Stock; four thousand shares of Second Preferred Stock and five thousand shares of Common Stock; and
    Whereas, James R. Lister has been in the employ of said co-partnership and intends to continue in the employ of said corporation at a salary of one hundred dollars ($100) per week; and the parties of the first part are the owners of the greater part of the stock of said corporation and desire the said party of the second part to continue in the employ of said corporation and intend to reward him if he faithfully performs his duties to said corporation for a period of three years from this date;
    Now therefore:
    1. I, the party of the second part, James R. Lister, do hereby for myself promise and agree with the parties of the first part to remain in the employ of said corporation at a salary of one hundred dollars ($100) per week for a period of three years from this date; and I do hereby agree that I wiU give my undivided attention to the business of the corporation, faithfully performing all the duties required of me by the officers of said corporation, and will be interested in no other business during said period.
    2. The parties of the first part do hereby agree to issue to the said party of the second part five hundred (500) shares of the Common Stock of Wal-worth Bros. Incorporated.
    3. Said party of the second part does hereby agree to endorse in blank said certificates of stock issued to him, and agrees to deliver the same to the said parties of the first part to be held by them in escrow during said period of three years.
    4. At the end of said period of three years, if the said party of the second part has continued in the employ of said corporation, the said parties of the first part agree to deliver said certificates to said party of the second part relieved of all trusts and as his absolute property.
    5. Should said party of the second part, however, during said period of three years cease to be employed by said corporation, he shall forfeit all rights to said stock. Should said party of the second part, however, die during said period while in the employ of said corporation, the said parties of the first part agree to deliver said stock to the executor or administrator of said party of the second part.
    6. It is distinctly understood, however, that said salary of one hundred dollars per week will be in full compensation for all services to be rendered by said party of the second part to said corporation, and that he shall at all times be under the control and direction of the directors of said corporation.
    7. The party of the second part shall be entitled to such dividends as may be declared on said stock while he is in the employ of said corporation during said period of three years.
    8. It is further understood and agreed that said stock shall not be assigned during said period of three years by the party of the second part, except to the said parties of the first part, and that any attempt to hypothecate or assign the same shall work a forfeiture of all his interest in said stock.
    9. The obligations on the part of the parties of the first part to make said delivery at the end of said three years, provided said party of the second part is then in the employ of said corporation, shall be binding upon said parties of the first part and their heirs, and assigns; and that said parties of the first part do hereby agree at all times during said period while the party of the second part is in the employ of said corporation to keep said certificates in the name of said party of the second part on the books of the Company, and said party of the second part shall have the voting power on said stock so long as it remains in his name on the books of said corporation.
    In witness whereof the said John P. Walworth and Charles W. Walworth, parties of the first part, and James R. Lister, party of the second part, hereto set their hands and seals this thirtieth .day of September, 1916.
    (Signed) Charles W. Walworth [seal]
    John P. Walworth [seal]

      Parties of the First Part.

    (Signed) James R. Lister [seal]

      Party of the Second part.

    Signed and sealed in presence of:
    Henry Finegold and the other employees to whom certificate for shares of stock were given entered into a similar agreement.
    About a year after the execution of the above-quoted agreement Charles W. Walworth, the president of the corporation, had numerous conferences at his New York office with his attorney or attorneys relative to a pending Federal income and profits tax law. In August or September, 1917, Charles W. Walworth communicated with the taxpayer and suggested that he and his brother were contemplating the organization of a “ sales corporation ” and that shares of stock in the sales corporation would be given to the common stockholders of Walworth Brothers, Inc. At that time or a little later he stated to the taxpayer that it would be necessary to substitute for the contract which the taxpayer had with John P. Walworth .and Charles W. Walworth another contract, and that this would not affect the taxpayer in any way. He further stated that the object of making the change was for bookkeeping purposes.
    The Walworth Sales Corporation was organized under the laws of the State of New York with a capital stock of 1,000 shares of no par value. The shares of stock of this corporation were divided among the common stockholders of Walworth Brothers, Inc., in the proportion of one share of stock of the sales corporation to each five shares of stock of Walworth Brothers, Inc. The taxpayer received a certificate for 100 shares of stock in Walworth Sales Corporation.
    The taxpayer never received any dividends upon the stock of the sales corporation. Under a contract between it and Walworth Brothers, Inc., the sales corporation received a commission of 7½ per cent upon the sale of the product of Walworth Brothers, Inc. It neither bought nor sold the product of any other manufacturer. The actual selling expense was from 1% per cent to 1½ per cent of the sales price. The sales corporation’s earnings were used to retire the preferred stock of Walworth Brothers, Inc., such preferred stock being owned principally, if not entirely, by John P. Walworth and Charles W. Walworth. The office of the sales corporation was the office of Walworth Brothers, Inc., in New York City.
    The contract of September SO, 1916, above quoted, was delivered up by the taxpayer to Charles W. Walworth in 1917, and the taxpayer was led to accept in substitution therefor a contract which reads as follows:
    Aoreement made this SOth day of September, 1917, between Walworth Bros. Incorporated, a body corporate of Lawrence, Mass., organized under the laws of the State of Maine, party of the first part; James R. Lister, of Methuen, Mass., party of the second part; and Charles W. Walworth, of Greenwich, Conn., and John P. Walworth, of Lawrence, Mass., parties of the third part; witnesseth:
    Whereas, the copartnership of Walworth Brothers has been dissolved and there has been formed therefrom the above corporation with a capital stock of one million dollars, divided into one thousand shares of first preferred stock, four thousand shares of second preferred stock, and five thousand shares; of common stock; and
    Whereas, James R. Lister has been in the employ of said copartnership and intends to continue in the employ of said corporation at a cash salary of one hundred dollars per week, to be paid to him weekly, and as additional compensation certain shares of stock' as hereinafter provided, said stock, however, to be paid to him only in the event that he faithfully performs his duties to said corporation for a period of three years from September SO, 1916;
    ■Now therefore:
    (1) I, the said party of the second part, James R. Lister, do hereby promise and agree with the parties of the first part to remain in the employ of said corporation for a period of three years from September 30, 1916, at a salary of one hundred dollars per week, to be paid to me weekly, and certain shares of stock to be credited to me on the terms and conditions herein contained. I do hereby agree that I will give my undivided attention to the business of said corporation, faithfully performing all duties required of me by the officers of said corporation, and will be interested in no other business during said period.
    (2) The party of the first part does hereby agree to issue or to procure and have issued to said party of the second part five hundred shares of common stock of Walworth Bros. Incorporated and one hundred shares of stock of Walworth Sales Corporation of no nominal or par value. ■

      (3) Said party of tlie second part does hereby agree to endorse in blank said certificates of stock issued to him, and agrees to deliver the same to Charles W. Walworth and John P. Walworth to be held by them in escrow during said period of three years.
    (4) At the end of said period of three years, if the said party of the second part has continued in the employ of said corporation, it is agreed that the said Charles W. Walworth and John P. Walworth shall deliver said certificates to said party of the second part relieved of all trusts as his absolute property.
    (5) Should the said party of the second part, however, during said period of three years cease to be employed by the said corporation he shall forfeit all his rights to said stock, in’ which event it is agreed that said five hundred (500) shares of common stock of Walworth Bros. Incorporated and said one hundred (100) shares of stock of Walworth Sales Corporation of no nominal or par value shall be transferred into the name of Charles W. Walworth and John P. Walworth; and in the event of said James R. Lister forfeiting his rights to said stock, he does hereby assign, transfer and set over all his rights to said stock and to the salary earned by him for services rendered to the corporation in excess of one hundred dollars per week to the said Charles W. Walworth and John P. Walworth. Should said party of the second part, however, die during the said period, while in the employ of said corporation, it is agreed that the said stock shall be delivered to the executor or administrator of the said party of the second part freed from all trusts.
    (6) It is distinctly understood that the party of the second part shall at all times be under the control and direction of the directors of said corporation.
    (7) The party of the second part shall be entitled to such, dividends as may be declared upon said stock while he is in the employ of said corporation during said period of three years.
    (8) It is further understood and agreed that said stock shall not be assigned during said period of three years by the party of the second part except to said Charles W. Walworth and John P. Walworth, and that any attempt to hypothecate or assign the same to others than the above shall forfeit all his interests in said stock.
    (9) The obligation on the part of the said Charles W. Walworth and John P. Walworth to make said delivery at the end of said three years, provided said party of the second part is then in the employ of said corporation, shall be binding upon the said Charles W. Walworth and John P. Walworth and their heirs and assigns, and the said Charles W. Walworth and John P. Wal-worth do hereby agree at all times during said period, while the party of the second part is in the employ of said corporation, to keep said certificates in the name of said party of the second part on the books of the corporations, and that the party of the second part shall have the voting powers on said stock so long as it remains in his name on the books of said corporations.
    (10) It is further agreed that semi-annually during said period of three years there shall be credited to the party of the second part on the books of the corporation one-sixth of the par value of said five hundred shares of common stock of Walworth Bros. Incorporated and one-sixth of said one hundred shares of stock of Walworth Sales Corporation of no nominal or par value, which shall be carried as an obligation of the party of the first part to the said James R. Lister for services rendered during the preceding six months, but which shall be cancelled on delivery of said stock at the end of said period of three years. Said credit, however, shall not be assignable or hypothecated, and any attempt to hypothecate or assign the same shall work a forfeiture of his rights to said salary.

      (11) The said Oharles W. Walworth and John P. Walworth are the present owners of said five hundred shares of common stock of Walworth Bros. Incorporated and said one hundred shares of stock of Walworth Sales Corporation of no nominal or par value, and it is agreed that they are loaning the same to the corporation to enable this agreement to be carried out. And it is further understood and agreed that if at the end of three years the said party of the second part has earned said stock, or, on account of death, the said stock has been delivered in accordance with this agreement, the obligation of the corporation to return or pay for said stock to said parties of the third part will at the end of said period of three years be cancelled.
    (12) It is agreed between all the parties hereto that the agreement made between them dated September 30, 1916, be and it hereby is cancelled.
    In witness whereof, the parties hereto and to another instrument of like tenor set their hands and seals the day and year first above written.
    (Signed) Walworth Brothers.
    By C. W. Walworth.
    James B. Lister. (Signed)
    C. W. Walworth. (Signed)
    (Signed) John P. Walworth.
    This substituted contract was received by the taxpayer several weeks after its date. Finegold’s substituted contract was received in the latter part of October or the first part of November, 1917. The contract was not carried out according to its terms. A certificate for 166 shares of common stock of Walworth Brothers, Inc., was turned over to the taxpayer in January or February, 1918. At the time this certificate was delivered the certificate for 500 shares in the name of the taxpayer, held in escrow, was canceled and a new certificate for 334 shares made out in the name of the taxpayer was endorsed by the taxpayer and turned over to John P. Walworth, to be held in escrow in place of the original certificate held in escrow. The taxpayer filed an income-tax return for 1917 in February, 1918, upon which a tax of $107.25 was shown to be due. In this return the taxpayer did not report the receipt of any income in respect of the 166 shares of stock of Walworth Brothers, Inc., turned over to him in January or February, 1918. Charles W. Walworth obtained knowledge of this fact and threatened to report the taxpayer for having filed a false return. He told the taxpayer that the return did not accord with the corporation’s books of account and that he must file an amended return reporting the receipt of $16,600 additional salary, inasmuch as that amount of salary had been charged up to him on the corporation’s books of account. The taxpayer protested that the shares of stock were a gift to him in respect of services which he had performed over a long period of years for the partnership and that, as a gift, they were not taxable as income; furthermore, that the additional tax which would be due from him upon the reporting of the receipt of such a large amount as salary would amount to more than $2,400, and that he had not received income which would warrant the payment of such a tax — approximately one-half of his salary. After considerable wrangling, Charles W. Walworth agreed that the corporation would purchase from the taxpayer 24 shares of stock at par, which would enable him to pay the additional tax which would be due. from him. Thereupon, the taxpayer turned over to the corporation his certificate for 168 shares and received a new certificate for 142 shares and the corporation’s check for $2,400, which the taxpayer turned over to the collector in part payment of the additional tax shown to be due by his amended return, the total tax due upon that return being $2,623.89.
    In the early part of 1919, the taxpayer received an additional certificate for 166 shares of stock. An income-tax return was made out for the taxpayer by the attorney for Walworth Brothers, Inc., for the year 1918, and in it was reported the receipt of his regular salary plus an additional salary represented by the stock certificate of $16,600. The tax due upon the taxpayer’s return for 1918 was in excess of $3,200 and the taxpayer’s employer or Charles W. Wal-worth purchased from him 36 shares of stock at $100 per share to enable him to pay his tax. .
    In the year 1919, the taxpayer was given an additional certificate for 168 shares of stock. The certificate was turned over to the taxpayer during the latter part of 1919. To enable the taxpayer to pay his income tax for 1919, Walworth Brothers, Inc., or Charles W. Walworth, purchased from him 32 shares of common stock at par.
    The taxpayer left the employ of Walworth Brothers, Inc., in 1920 and endeavored to sell the 428 shares of stock which he had received but had not sold to his employer or to Charles W. Walworth. His brokers found no market for the shares. They were finally sold in 1921 at $12 per share. The taxpayer received approximately $5,000 from the sale.
    Dividends at the rate of 6 per cent per annum were paid upon the common stock for 1918, 1919, and 1920, and the taxpayer received the dividends upon the shares of stock standing in his name.
    There were no sales of the stock in 1917 or 1918, except the purchases by the corporation or by Charles W. Walworth of the stock of the employees under substituted contracts similar to the one dated September 30, 1917, quoted above, all of these purchases being at a price of $100 per share. In 1919, Walworth Brothers, Inc., desired to terminate the employment of Henry Finegold, who had proven to be a troublemaker in respect of the compensation and dividends which he had been receiving upon his stock. He had approximately 444 shares of stock at the time, and the corporation offered him $8,000 or $9,000 for them. This amount Finegold refused to accept, on the ground that he owed about $20,000 and had to raise money to pay that amount of indebtedness. The corporation finally agreed to pay him $20,000 for his 444 shares in order to get him out of the company and to terminate his contract.
    The taxpayer was not in business for himself and kept no regular books of account. His income-tax returns were made on the basis of cash receipts and disbursements.
    The shares of the common stock of Walworth Brothers, Inc., had a fair market value in 1919 of $28.50 per share. The shares of stock of Walworth Sales Corporation had no market value at any time.
    DECISION.
    The deficiency, if any, should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, in accordance with Bule 50.
   OPINION.

Smith

: In his original income-tax return for 1917, the taxpayer did not report the receipt of any income in respect of 166 shares of stock of Walworth Brothers, Inc., which were charged to him at par value as salary on the corporation’s books of account for the year 1917. He understood that these shares of stock were a gift to him and, accordingly, that he received no taxable income from this source.

An inspection of the original contract made between John P. Walworth and Charles W. Walworth, Lawrence, Mass., and the taxpayer, dated September 30, 1916, shows that the shares of stock were to be paid to the taxpayer “ if he faithfully performs his said duties to the corporation for a period of three years from this date.” It was provided that the shares of stock would be held in escrow by the Walworths until the taxpayer had completed his three years of service. If this had been done the taxpayer would not have received any income in respect of the shares of stock until they were actually received at the end of the three-year term. For the original contract of September 30, 1916, there was substituted a contract dated September 30, 1917, which provided in part that:

Whereas, James R. Lister lias been in the employ of said copartnership and intends to continue in the employ of said corporation at a cash salary of one hundred dollars per week, to be paid to him weekly,.and as additional compensation certain shares of stock as hereinafter provided, said stock, however, to be paid to him only in the event that he faithfully performs his duties to said corporation for a period of three years from September 30, 1916;
Now therefore: * ⅜ *
(10) It is further agreed that semi-annually during said period of three years there shall be credited to the party of the second part on the books of the corporation one-sixth of the par value of said five hundred shares of common stock of Walworth Bros., Incorporated and one-sixth of said one hundred shares of stock of Walworth Sales Corporation of no nominal or par value, which' shall be carried as an obligation of the party of the first part to the said James It. Lister for services rendered during the preceding six months, but which shall be cancelled on delivery of said stock at the end of said period of three years. ⅜ *

We can not doubt, in view of this language of the contract, that the shares of stock of Walworth Brothers, Inc., and of Walworth Sales Corporation were intended to be paid to the taxpayer and were paid to him as compensation for services to be rendered Walworth Brothers, Inc., over a three-year period ended September §0, 1919. To the extent that the shares of stock at the time they came into the possession and ownership of the taxpayer had a cash value, such cash value constitutes income of the taxpayer in the year of such receipt or ownership.

The evidence before us indicates an attempt on the part of Charles W. Walworth and John P. Walworth, on behalf of Walworth Brothers, Inc., to relieve the corporation from a large part of its income and excess-profits-tax liability for the years 1917, 1918, and 1919. An inspection of the original contract dated September 30, 1916, shows that the two Walworth brothers desired to compensate the taxpayer, who had been in their service for many years. The common stock of the corporation had been issued to them. They decided to give to the taxpayer 500 shares of the common stock but, before he could receive it, he must agree to work for Walworth Brothers, Inc., for a period of three years at a salary of $100 per week. This contract on its face never contemplated that the corporation should be subjected to any expense in respect of the gift of the shares.

When the terms of the income and profits-tax law of 1917 became known, Charles W. Walworth and his attorney apparently conceived a means of escaping a large part of the tax liability which was cast upon the corporation by the taxing act. There was first organized the Walworth Sales Corporation. The evidence before us and the testimony of one of the officers of the corporation indicate that the only excuse for the existence of this corporation was to reduce income-tax liability. It had the same office as Walworth Brothers, Inc., in New York City, and it was simply operated as the selling end of the business. Although the cost of selling was only about 1 ½ per cent of the selling price, the sales corporation was allowed a commission of 7½ per cent upon sales. The profits of the sales corporation were, under an agreement entered into by Walworth Brothers, Inc., and the sales corporation, to be used in acquiring the preferred stock of Walworth Brothers, Inc., owned by Charles W. Walworth and John P. Walworth, and the evidence is to the effect that approximately $200,000 of the preferred stock was acquired through the earnings of this corporation.

Although the 500 shares of stock which were to be given to the taxpayer did not belong to Walworth Brothers, Inc., the substituted contract of September SO, 1917, which the taxpayer was led to accept, provides that the shares of stock of both Walworth Brothers, Inc., and Walworth Sales Corporation are loaned to Walworth Brothers, Inc., “ to enable this agreement to be carried out.” The contract further provides that it is “understood and agreed that if at the end of three years the said party of the second part [the taxpayer] has earned said stock, or, on account of death, the said stock has been delivered in accordance with this agreement, the obligation of the corporation to return or pay for said stock to said parties of the third part will at the end of said period of three years be cancelled.” This language indicates that it was never the intention of the contracting parties that the corporation should be required to pay for the shares of stock.

We are convinced from a consideration of the entire evidence that the giving of the stock to the taxpayer never resulted in any expense to Walworth Brothers, Inc., and that, if it charged on its books of account any salary as having been paid to the taxpayer during the three-year period of the contract in excess of $100 per week, its books of account do not reflect actual facts.

Even though Walworth Brothers, Inc., did not pay the taxpayer during the tax years in question any amount in excess of $100 per week, this does not mean that the taxpayer did not derive any income from his employment by Walworth Brothers, Inc., in addition to the $100 per week cash paid him. The 500 shares of common stock of Walworth Brothers, Inc., and 100 shares of stock of Walworth Sales Corporation were paid to the taxpayer by Charles W. Walworth and John P. Walworth, in consideration of services to be performed for the corporation over a three-year period. The fair value of those shares at the time they became his absolute property constituted taxable income to him. But when did they become his absolute property, and what was their value at that date ?

An inspection of the substituted contract shows that the ownership of the shares of stock was to remain in Charles W. Walworth and John P. Walworth until the taxpayer had completed three years of service to Walworth Brothers, Inc. At the end of the period the .certificates for the shares were to be delivered to the taxpayer “ relieved of all trusts as his absolute property.” If the taxpayer ceased to be employed by the corporation prior to the end of the period, he forfeited all his rights to the shares of stock. During the period the taxpayer could not assign the shares to any one, except Charles W. Walworth and John P. Walworth, and any attempt to hypothecate or assign his rights in them to others would forfeit all his interests in them. Under these specific provisions of the agreement, we do not consider that the actual delivery of the certificates for a part of the shares to the taxpayer in 1918 and 1919, prior to the end of the three-year period, was such a modification of the contract as to make the value of the shares at the date of receipt income to the taxpayer. The stock certificates delivered to the taxpayer in 1918 and in the early part of 1919 were impressed with a trust, to hold the shares for the real owners, namely, Charles W. Walworth and John P. Wal-worth. The taxpayer came into the ownership of-the shares only upon the completion of the three years of service in the latter part of 1919.

During the year 1918 the taxpayer received from Charles W. Walworth $2,400, in consideration of which he relinquished all his right to and interest in 24 shares of Walworth Brothers, Inc., which he was to receive in absolute ownership at the termination of the three-year period. The receipt of this money was income to the taxpayer in the year 1918. During the year 1919 the taxpayer came into absolute possession and ownership of 476 shares of the common stock of Walworth Brothers, Inc., and, also, 100 shares of the stock of Walworth Sales Corporation. What was the fair market value of those shares at the date they came into the ownership of the taxpayer?

The evidence is to the effect that the shares of stock of both corporations were closely held and that there were no sales in the open market. In 1919, Henry Finegold was offered $8,000 or $9,000 by Charles W. Walworth for approximately 444 shares of the common stock of Walworth Brothers, Inc. Finegold refused the offer and then, in order to get Finegold out of the company, he was finally paid $20,000 for his shares. This is at the rate of approximately $45 a share but, in our opinion, this does not reflect the actual value of the shares of stock, even though at the time dividends at the rate of $6 a year were being paid upon them. The common stock of Walworth Brothers, Inc., received by the taxpayer, which was not taken back by Charles W. Walworth at a price which enabled him to pay his income taxes, was sold by the taxpayer in 1921 for $12 a share. From all the evidence we conclude that the stock received by the taxpayer was worth, at the date of its receipt in 1919, $28.50 a share. The shares of stock of Walworth Sales Corporation received by the taxpayer apparently never had any fair market value and the taxpayer never realized a dollar for his 100 shares of stock received. The taxpayer realized no income from the receipt of these 100 shares. In the early part of 1919, the taxpayer relinquished his right to 36 shares of common stock of Walworth Brothers, Inc., and received from Charles W. Walworth $3,600. For the purpose of computing the income of the taxpayer for the year 1919, this should be treated as a sale of 36 shares at $100 a share; the cost to the taxpayer of those shares was $28.50 a share. In 1920, the taxpayer sold 32 shares to Charles W. Walworth at $100 a share and derived a profit of $71.50 a share upon such sale.

At the hearing the taxpayer moved to amend his petition by having an alleged excess payment of income tax for the year 1917, in the amount of $2,516.64, credited against any deficiency which might be found to be due from the taxpayer for either of the years 1918 or 1919. ■ The taxpayer alleged that a claim for the refund of the overpayment of tax for the year 1917 had been filed with the Commissioner within five years from the date of the payment of the tax, and that under the decision of this Board in Appeal of Hickory Spinning Company, 1 B. T. A. 409, the taxpayer was entitled to the credit. Counsel for the Commissioner did not admit the filing of a claim for the refund within five years from the date of the payment of the tax, and the taxpayer adduced no proof of the filing within such period. In the absence of information upon this point, the request for the credit must be denied. The question whether the Board would have jurisdiction to allow such credit in computing the net deficiency provided the filing of the claim for refund within the five-year period had been proven, is not herein determined.


source: Caselaw Access Project

license: Public Domain

text:
    Appeal of THE ANTHRACITE TRUST CO., Administrator, Estate of JOHN JOSEPH BROWN, Deceased.
    Docket No. 4947.
    Submitted December 12, 1925.
    Decided January 28, 1926.

      L. E. Renard, Esq., for the taxpayer.

      Franlc T. Horner, Esq., for the Commissioner.
    Before Littleton, Smith, and Tettssell.
    This is an appeal from the determination of a deficiency of $3,888.78 in estate tax, of which $2,622.50 is in controversy. The tax in controversy arises from the action of the Commissioner in increasing the value of 250 shares of stock of the Pittston Coal Mining Co., owned by the decedent at the time of his death, from $230 a share, as now claimed by the administrator, to $500 a share.
    findings of fact.
    The Anthracite Trust Co. is the qualified and acting administrator of the estate of John Joseph Brown, deceased. At the time of his death the decedent was the owner of 250 shares of the capital stock of the Pittston Coal Mining Co., located near Scranton, Pa., the remaining 750 shares of said stock being owned by M. W. O’Boyle. The stock had always been closely held, and was not listed on any exchange; it was not quoted by any local brokers, and there had been no sales thereof prior to the decedent’s death on March 20, 1923. Soon after the decedent’s death the administrator asked for bids from local brokers and others for the stock, but it did not receive what it regarded as a substantial bid until January, 1924, when a bid of $110 a share was received. The administrator thereupon caused an investigation to be made to determine the fairness of the offer of $110 a share, and was furnished a balance sheet by the Pittston Coal Mining Co., showing the stock to have a value of $110 a share, whereupon the offer of the persons in control of the Pittston Coal Mining Co. to purchase 150 shares at $110 a share was accepted by the administrator, the remaining 100 shares being sold to the heirs of the decedent at $110 a share. On April 30, 1924, the administrator came into possession of facts indicating that the information furnished it concerning the value of the stock of the Pittston Coal Mining Co. was incorrect, and took steps to have the purchasers of the stock pay an additional amount per share for the stock, based upon a correct statement of the assets and liabilities, as shown by the books on March 20, 1923, as follows:
    ASSETS.
    Cash_ 189,290.89
    Due from Pittston Coal Sales Co- 134,335. 57
    Due from M. W. O’Boyle_ 44,090.22
    Automatic Telephone Co. bonds- 60, 000. 00
    Liberty bonds_ 121, 800.00
    Machinery and equipment_ 69,141.32
    Total_ 518, 658.00
    LIABILITIES.
    Bills payable. $30,833.33
    Capital_ 100, 000. 00
    Surplus_ 387, 824.67
    Total_-_ 518, 658. 00
    As a result the purchasers of the 150 shares and the 100 shares, at $110 a share, paid to the administrator in January, 1925, an additional sum of $120 a share. On May 2, 1925, the purchaser of 100 shares of the stock from the administrator sold the same for $230 a share. The net profits of the Pittston Coal Mining Co. for the years 1918 to 1923, inclusive, were as follows:
    1918-⅜55, 070.04
    1919- 96, 604.16
    1920- 142,914.32
    1921- 75,455. 08
    1922 (when there was a strike for 6 months of the
    year)- 34,036.95
    1923 -- 118, 207.77
    As of March 20, 1923, the Pittston Coal Mining Co. had almost exhausted its recoverable coal.
    The administrator filed an estate-tax return on March 13, 1924, and included the 250 shares of stock of the Pittston Coal Mining Co. at a valuation of $27,500, or $110 a share. The Commissioner fixed its value at $500 a share. The value of the 250 shares of stock at the time of the decedent’s death was $400 a share.
   DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be settled on 10 days’ notice, under Rule 50.


text:
    Appeal of STAR ELECTRIC CO.
    Docket No. 4185.
    Submitted October 27, 1925.
    Decided January 28, 1926.

      Myron J. Stone for the taxpayer.

      L. O. Mitchell, Esq., for the Commissioner.
    Before Smith, Littleton, and Tetjssell.
    This appeal is from the determination of a deficiency in income and profits tax for the year 1920 in the amount of $1,811.47. The question in issue is the right of the taxpayer to deduct from the gross income of 1920 an amount of $6,969.51, representing expenditures for partitions and other interior alterations upon property leased by the taxpayer for a term of 10 years.
    FINDINGS OF FACT.
    The taxpayer is- a Massachusetts corporation, with its principal office at Worcester. The lease upon the premises in which its business was carried on expired in 1920 and it was required to seek other quarters. It leased a store and a cellar in the locality of its former store for a period of 10 years from February, 1920. To fit this store properly for the transaction of its business, which is that of electrical contracting and the retailing of electrical supplies, the taxpayer made such partitions and shelving alterations as it deemed necessary. The total amount spent for such alterations in 1920 was $6,969.51, which amount was claimed as a deduction from gross income in its tax return for the year 1920, but which was disallowed by the Commissioner as an expense deduction, although one-tenth thereof was' allowed as a deduction on accoimt of depreciation.
   DECISION.

The determination of the Commissioner is approved. Appeal of National City Bank of Seattle, 1 B. T. A. 139; Appeal of Simmons & Hammond Manufacturing Co., 1 B. T. A. 803.


text:
    Appeal of MAX D. STEUER.
    Docket No. 4430.
    Submitted October 28, 1925.
    Decided January 28, 1926.
    The March 1, 1913, value of property determined.

      Sidney Ehrlich, Esg., for the taxpayer.

      George G. Witter, Esg., for the Commissioner.
    Before Smith, Littleton, and Tettssell.
    This appeal is from the determination of a deficiency in income tax for 1921 in the amount of $16,052.89, only a part of this amount being in controversy. The question in issue is the loss sustained on property sold in 1921. ⅜
    FINDINGS OF FACT.
    The taxpayer is a resident of New York City. In 1903 he purchased the premises at 225 East Fifty-third Street, New York City, at a cost of
    Land_$31,000
    Building_ 45,000
    Total_ 76,000
    He sold the premises in 1921 at a net price of $56,133.77. In his income-tax return for the year he determined his loss upon the transaction as follows:
    Cost and March 1, 1913, value-$76, 000. 00
    Selling price- 56,133. 77
    Loss_ 19, 866.23
    The Commissioner has computed the cost at $76,000, less depreciation for 18 years on $45,000 — $16,200—balance $59,800; and on that basis fixed the deductible loss at $3,666.23. From the same data he computed March 1, 1913, value at $61,000 — $76,000 less depreciation for 10 years, $9,000 — less depreciation to date of sale $7,200; loss on sale $3,666.23.
    The March 1, 1913, value of the property in question was $67,000 and the depreciation sustained thereon from March 1, 1913, to the date of sale in 1921 was $7,200. The net loss resulting from the sale was $3,666.23.
    DECISION".
    The determination of the Commissioner is approved.
   OPINION".

Smith

: In his appeal the taxpayer claims a loss upon the sale of the premises at 225 East Fifty-third Street, New York City, in 1921 of $12,666.23. He waives any question as to the correctness of the determination of the Commissioner that depreciation in the amount of $7,200 was sustained from March 1, 1913, to the date of sale, and that such depreciation should be taken into account in the determination of the profit from the sale. He contends, however, that the March 1, 1913,.value was $76,000 instead of the amount allowed by the Commissioner, which is found to have been $67,000. In support of a March 1, 1913, value of $76,000 the taxpayer has submitted an appraisal made by an expert appraiser of New York City. This appraiser keeps careful record of sales of property in New York City. He states that, in his opinion, the fair market value of the property on March 1, 1913, was:

Land-v-$31,000
Building _1- 45, 000
Total_ 76, 000

He further states that the following sales should be relevant:

Sale February, 1906.
No. 219 East 53rd Street, north side, 391.8 feet west of Second Avenue. Size 16.8x100.5. Building three (3) story brick tenement sold for $11,100.
Sale April, 1906.
No. 224 East 53rd Street, south side, 260 feet east of Third Avenue. Size 20x100.5. Building three (3) story dwelling sold for $12,000.
Sale November, 1906.
Nos. 226-228 East 53rd Street, south side, 299 feet west of Second Avenue. Size 40 x 100.11. Building six (6) story brick tenement sold for $64,900.
Sale July, 1918.
No. 234 East 53rd Street, south side, 230 feet west of Second Avenue. Size 20x100.5. Building three (3) story dwelling sold for $10,750.

Judging from these sales alone, it appears that the property located at 234 East Fifty-third Street sold in July, 1913, for $1,250 less than the property located at 224 East Fifty-third Street did in April, 1906. The size of each lot was the same and the improvements were the same, so far as the record discloses. These sales indicate a decline in values of the property in the neighborhood of taxpayer’s property from 1906 to 1913. We think that such evidence is entitled to as much weight as the estimate of an appraiser made in 1924 or 1925 of the value of property in New York City in 1913. At any rate, we do not consider that the evidence is strong enough to overrule the determination of the Commissioner as to the value of the property on March 1, 1913. The property was tenement property and was subject to wear and tear during the entire period 1903 to 1913.


text:
    Appeal of WALTER NEUSTADT.
    Docket No. 2896.
    Submitted November 10, 1925.
    Decided January 28, 1926.

      Walter Neustadt pro se.

      John W. Fisher, Esq., for the Commissioner.
    Before Smith, James, Littleton, and Tkussell.
    This is an appeal from the determination of a deficiency for the year 1919 in the amount of $1,096.15. The question in issue is whether the taxpayer is liable to income tax upon the difference between the cost of a share of stock purchased in 1919 and sold within the year at $9,900 more than the purchase price.
    FINDINGS OF FACT.
    The taxpayer is an oil and lease broker and a resident of Oklahoma. He filed an income-tax return for the year 1919, in which he stated that he was married and living with his wife on December 31, 1919, and that his wife did not make a separate return. In the return he claimed a deduction from gross income of an alleged loss of $3,333.33 upon the sale of one share of stock of the Hog Creek Oil Co., which share was purchased within the year for $100 and sold within the year for $10,000. The Commissioner has disallowed the deduction of the alleged loss of $3,333.33, and added to the gross income reported $9,900, representing the difference between the cost and the sales price.
    In June or July, 1919, the taxpayer turned over to his wife the certificate for the share of stock in question, which certificate stood in his own name. He had promised to give her the share of stock some time prior thereto. The taxpayer’s wife placed the certificate in a bureau drawer, where it remained for some weeks. At the time she was living in New York City. On July 30, 1919, the taxpayer telegraphed to his wife as follows:
    Shall I sell your one share of Hog Creek for ten thousand.
    She replied on the same date:
    Sell as cash can be reinvested advantageous.
    The share of stock was sold at the price indicated and $10,000 was placed to the credit of Mrs. Dorris W. Neustadt in the Guaranty State Bank of Ardmore, Okla., on August 28,1919. Against this account, increased by a deposit of $450 on October 15,1919, checks were drawn on September 24 and October 14 for $9,000 and $1,050, respectively. These checks were signed by D. W. Neustadt in the handwriting of the taxpayer. The Guaranty State Bank knew at the time that the signature D. W. Neustadt was made by the taxpayer. . Securities purchased with the funds withdrawn were purchased in the name of the taxpayer’s wife.
    The certificate for the one share of Hog Creek Oil Co. stock always stood upon the books of said company in the name of Walter Neustadt. Under date of August 2, 1919, the certificate was assigned by Walter Neustadt to Dorris W. Neustadt, of Ardmore, Okla.
    On or before August 1, 1919, there were certain reports in a number of newspapers that either the Standard Oil Co., the Sinclair Oil Co., or the Magnolia Petroleum Co., had offered to purchase the capital stock, of the Hog Creek Oil Co. at the price of $13,333.33 per share.
   DECISION.

The determination of the Commissioner is approved.


text:
    Appeal of UNITED STATES TOOL CO.
    Docket No. 4650.
    Submitted October 13, 1925.
    Decided January 28, 1926.

      Bernard Knollenberg, Esq., for the taxpayer.

      M. N. Fisher and J. T. Dortch, Esqs., for the Commissioner.
    Before Korner.
    This appeal is from the determination by the Commissioner of a deficiency in income and profits tax for the year 1920 in the amount of $1,799.99. The portion of the deficiency here in controversy is approximately $1,300, and grows out of the disallowance of a deduction taken by the taxpayer on account of a bad debt.
    FINDINGS OF FACT.
    1. The taxpayer is a New Jersey corporation, with its principal office at Ampere, and is engaged in the manufacture of tools. Some time prior to 1920 the International Money Machine Co. opened an account with the taxpayer and contracted for a special line of tools needed by them in bringing out a new adding machine. That com- • pany agreed to discount all bills in 10 days. Under this agreement the taxpayer began the manufacture and delivery of the tools contracted for.
    2. For a while all went well and the International Money Machine Co. paid its bills promptly. Finally the checks failed to come and Squarey, the secretary, treasurer, and general manager (now president, treasurer, and general manager) began an investigation of the affairs of the taxpayer’s debtor. The debtor’s account then stood at $4,031.26. In September, or early in October, 1920, he went to the plant of the debtor to see its president. The latter declined to see him. Squarey found the debtor’s shop closed down and interviewed one of the mechanics there, who told him, in the vernacular of the trade, that the International Co. “ was ready to take the gas pipe,” which, being interpreted, means that the company was “broke.” Squarey knew the adding machine business thoroughly and knew the kind of machine which the debtor company was trying to put out. From his experience and knowledge he concluded that the taxpayer’s account with that company was absolutely worthless.
    3. During the ensuing weeks the taxpayer made further effort to collect its account, but without success, and then took the matter up with its attorney. The latter, after investigation, advised the taxpayer that the debt was worthless and would not- yield the expense attached to the effort to collect it. He further advised that the account should be charged off as worthless. During the course of his inquiries, taxpayer’s attorney had caused investigation to be made of the debtor’s affairs and had had the matter taken up with the debtor’s attorney, looking to a settlement on some basis, but without avail. The investigation disclosed that the debtor was-on the verge of bankruptcy. In fact, it did go into bankruptcy on January 12, 1921.
    4. The final advice received by the taxpayer as to the debtor’s condition was about December 24, 1920. Soon thereafter, the four directors of the taxpayer, who were also the four stockholders, held a meeting and were unanimously of the opinion that- the debt was worthless and should be charged off forthwith.
    5. The records of the company were kept in an archaic fashion. There was no bookkeeper. Ho officer of the company had a desk. Such records as were kept were kept by Squarey in the machine shop on a drafting board. Squarey, the secretary-treasurer, did not want to lose track of the debt altogether, but desired to keep some memorandum entry of it for the future. Under his method of keeping the records, he feared that a mere charging off would cause the account to be lost sight of, so he attempted to effect a charge off by setting up a reserve, in the amount of this account, against the earnings for the year. The actual process of setting up this reserve, as herein outlined, did not take place until some time after January 1, 1921, probably in January of that year.
    6. Nothing was realized on this account until the year 1924, when the taxpayer received $249.81 in the settlement of the bankruptcy proceedings. The amount so recovered in 1924 was reported as income for that year. The entire amount of the debt was charged off as hereinabove set out, and no deduction was taken for it, or any portion of it, in any year other than 1920.
   DECISION.

The tax should be computed by allowing as a deduction the account of the International Money Machine Co. in the amount of $4,081.36. Final determination will be settled on 15 days’ notice, under Rule 50. Appeals of Huning Mercantile Co., 1 B. T. A. 130; Charles A. Collin, 1 B. T. A. 305, 308.


author: Phillips:

text:
    Appeal of SOL FRANKEL, INC.
    Docket No. 3253.
    Submitted October 11, 1925.
    Decided January 28, 1926.
    1. Deduction for alleged additional salaries to officers disallowed.
    2. Taxpayer held to be entitled to computation of 1919 profits tax under section 328 of tbe Revenue Act of 1918.

      Benjamin Mahler, Esq., and Isidore Schlanger, C. P. A., for the taxpayer.

      W. Frank Gibbs, Esq., for the Commissioner.
    Before GeatjpneR and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes for the calendar year 1919 in the amount of $16,565.53. It is contended by the taxpayer that the Commissioner erred in failing to allow reasonable salaries of officers and in failing to compute the tax under section 328 of the Revenue Act of 1918.
    v FINDINGS OP FACT.
    The taxpayer is a New York corporation, with its principal place of business in New York City. It was organized in 1908, succeeding to the business of Sol Frankel, which he had operated for a number of years prior thereto as an individual.
    In 1919 the taxpayer had three stockholders, all of whom were actively engaged in the conduct of its business, which was that of commission merchants, selling live poultry in New York on a commission basis.
    Herbert Frankel, principal stockholder and president of the taxpayer, had been actively engaged in the commission business for a number of years, having been in the employ of his father, Sol Frankel, prior to the incorporation of the taxpayer. His activities consisted principally of soliciting shipments of live poultry from shippers located in various parts of the United States. In 1919 he made several trips through the middle west and the west, and by his efforts secured about 90 per cent of the shipments received by .the taxpayer in that year, which amounted in value to about $3,500,000.
    Bertram Frankel, brother of Herbert Frankel, and an officer and stockholder of the taxpayer, was in charge of sales and checked all credits. The taxpayer was responsible to shippers for the collection of accounts and Bertram Frankel had the responsibility of checking the accounts, which, in 1919, amounted to about $4,000,000.
    M. J. Cohen, an officer and stockholder, was responsible for unloading live poultry from cars and grading it into various classes, and he also assisted Bertram Frankel in making sales. He had been in the business for about 30 years and had become experienced in grading poultry. He has charge of from 10 to 40 men, and the speed with which cars are unloaded depends upon him. It is necessary that poultry be removed from the cars as quickly as possible, in order to avoid loss through high feeding costs and also for the reason that the death rate of poultry while in cars is high.
    The salaries drawn by the three officers during 1919 were: Herbert Frankel, $10,400; Bertram Frankel, about $2,000; and M. J. Cohen, about $3,000. The total amount drawn by these three for the year was $15,865. On the basis of salaries paid to officers and employees performing similar services for other dealers doing a similar kind and volume of business in the City of New York, reasonable compensation for the services rendered the taxpayer by Herbert Frankel in 1919 was $20,000 and for the services rendered by Bertram Frankel and M. J. Cohen was $12,500 each.
    The taxpayer’s gross income for 1919 from commissions was $110,329.40. The net income of the taxpayer, as determined by the Commissioner, after allowing $15,865 as a deduction for officers’ salaries, was $45,446.79.

      The taxpayer filed a return for 1919 as a personal service corporation and listed thereon as salaries the amount drawn by the three stockholders. The Commissioner denied the taxpayer classification as a personal service corporation and advised it of the determination of the deficiency here in issue by letter dated February 16,1925. On February 28, 1925, after receipt of the notice of the deficiency, the taxpayer charged $29,135 against its surplus account and credited the accounts of Herbert Frankel with $9,600, Bertram Frankel with $10,675, and Cohen with $8,860, stated to be “ balance of 1919 salaries.”
    The taxpayer conducted its business on premises for the use of which a permit had been obtained'by Sol Frankel from the City of New. York prior to the organization of the taxpayer, and for which he was required to pay an annual rental of about $4,000. The premises contained a shed about 250 feet long by 100 feet wide, divided into two parts by a central wall running lengthwise of the structure. There were no outside walls. The shed was divided by Sol Frankel into 15 units or stands, of which 6 were sold prior to the organization of the taxpayer. The remaining 9 stands were transferred to the taxpayer upon its organization. The stands which were sold contained the office and certain improvements, so that it became necessary to construct an office and make certain improvements in the remaining 9 stands to render them suitable for the business conducted. This was done by Sol Frankel at a cost of $10,670. The improvements made on the premises and the equipment which had been used by Sol Frankel were turned over to the corporation upon its organization. The earnings of Sol Frankel for 1905 were $11,-654.63, and for 1906, $8,604.44.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Rule 50.
   OPINION.

Phillips:

At the time taxpayer’s return for 1919 was filed, it claimed classification as a personal service corporation. This claim was denied by the Commissioner and is no longer urged by the taxpayer.

The taxpayer claims the right to deduct for 1919, as salaries of its officers, $45,000. There is testimony in the record to the effect that, in December, 1918, an informal meeting of the officers and directors was held, at which the salary of Herbert Frankel for 1919 was fixed at $20,000 and the salaries of Bertram. Frankel and Cohen at $12,500 each. There is other testimony that, because money was needed in the business, each of these officers agreed to draw only so much as was necessary for his living expenses. The only salaries entered on taxpayer’s books for 1919 were the amounts drawn, and it was not until 1925, when personal service classification had been denied the taxpayer, that the additional amounts here in issue were entered upon the books. Giving consideration to all of the testimony taken and to the manner in which the salary was treated on the books of the corporation, we would not feel justified in holding that any liability for officers’ salaries was incurred in 1919 in excess of the amount paid and charged upon the books in that year.

The taxpayer claims that it is entitled to have its taxes computed under section 328 of the Revenue Act of 1918 upon two grounds. The first of these is that the capital stock of the corporation was issued to Sol Frankel for both tangible and intangible property, the value of which can not be determined. The testimony establishes the fact that the corporation acquired from Sol Frankel the lease of certain premises in the City of New York, together with a license to conduct the live-poultry business upon such premises. Without doubt the property acquired was valuable, but a minute examination of the record fails to disclose any testimony that these assets were acquired for the issue of the capital stock of the taxpayer. So far as the testimony shows, these assets may have been purchased by the corporation from Sol Frankel for cash.

The second ground for assessment under section 328 is that the salaries paid the officers, who were also the only stockholders, are wholly inadequate for the services performed and result in an abnormality of income. It has been established to our satisfaction that the services rendered were reasonably worth $45,000. Of this amount only $15,865 can be allowed as a deduction. The net income determined by the Commissioner, after deducting salary paid to the officers, is $45,446.79. Had reasonable compensation been paid, the net income would have been $16,311.79, approximately one-third of the amount upon which- taxpayer is liable for the payment of tax. In our opinion an abnormal condition affecting the income of the taxpayer results so as to bring it within the provisions of section 327 of the Revenue Act of 1918. The Commissioner should compute the tax under section 328 by comparing taxpayer with representative concerns as defined by the Act, and his computation thereunder will be deemed final, as the taxpayer introduced no evidence with respect to proper comparatives. Appeal of Rex Machinery & Supply Co., 3 B. T. A. 182.


author: James:

text:
    Appeal of R. C. MUSSER.
    Docket No. 4781.
    Submitted October 13, 1925.
    Decided January 28, 1926.
    1. Under Title IX of tbe Revenue Act of 1921, tbe tax imposed on sales by manufacturers of automobiles and accessories is not deductible by individual purchasers of sucb products.
    2. Claimed allowance for exhaustion of automobile used in business, held proven under tbe facts as found.

      A. H. Murray, Esq., for the Commissioner.
    Before James, Littleton, Smith, and TRUSsell.
    This is an appeal from the determination of a deficiency in income tax due for the year 1922 in the amount of $46.46.
    BINDINGS OP PACT.
    The taxpayer is an officer in the United States Regular Army, on active duty at Fort McKinley, Eizal, Philippine Islands.
    In the year 1922 the taxpayer paid as part of the purchase price of an automobile $150, which was designated as war tax paid to the manufacturer by the purchaser, and he claimed this amount as a deduction from income on his Federal income-tax return for the year 1922.
    In and during the year 1922 the taxpayer, in connection with his official duties as depot veterinarian, Sixth Corps Area, Chicago quartermaster depot, used the said automobile in making trips to and from various packing plants and places of duty in and about Chicago. Depreciation of the said automobile in the amount of $900 was also claimed as a deduction on the taxpayer’s income-tax return for 1922. A reasonable allowance for such exhaustion is $750. The Commissioner disallowed both the deduction for automobile tax and that for depreciation.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Rule 50.
   OPINION.

James:

Section 900 of the Revenue Act of 1921 provides as follows:

TITLE IX.-EXCISE TAXES.
Sec. 900. Tbat from and after January 1, 1922, there shall be levied, assessed, collected, and paid upon tbe following articles' sold or leased by the manu-faeturer, producer, or importer, a tax equivalent to the following percentage of the price for which so sold or leased—
(1) Automobile trucks and automobile wagons (including tires, inner tubes, parts, and accessories therefor, sold on or in connection therewith or with the sale thereof), 3 per centum;
(2) Other automobiles and motor cycles (including tires, inner tubes, parts, and accessories therefor, sold on or in connection therewith or with the sale thereof), except tractors, 5 per centum.

Under the Revenue Act of 1918 there was levied a war tax on many so-called luxuries, such as toilet articles, ice cream, etc., which was regarded as a tax imposed upon the consumer and allowed as a deduction to the consumer in computing net income. These taxes were for the most part repealed by the 1921 Act. Both the 1918 and the 1921 Acts levied certain excise taxes on automobiles and accessories, which were imposed on, sales by the manufacturer, and the tax was frequently passed on to the purchaser as part of the purchase price, as in the instant case.

The war tax on automobiles sold by manufacturers is a tax imposed upon sales by the manufacturers and is not an allowable deduction in computing net income of a purchaser.

It appears from the findings of fact, above set forth, that the taxpayer used the automobile in question not as a means of transportation from his home to his place of business, but for making trips to and from the several points where his business was carried on. This constituted a business use of the automobile, and the conceded exhaustion of $150 should be allowed in computing the net income of the taxpayer.


author: Marquette

text:
    Appeal of PATRICK J. SHOUVLIN.
    Docket No. 1397.
    Submitted September 1, 1925.
    Decided January 28, 1926.
    1. Loans by an individual to a corporation of which he was the sole stockholder, from funds of a business conducted by him as sole proprietor, for the purpose of enabling the corporation to pay its debts and expenses, are personal loans, and may not be included in invested capital of the sole proprietorship as accounts receivable.
    2. Under the Revenue Act of 1918, a part of a debt may not be written oft as worthless.

      James B. Malone, Esq., for the taxpayer.

      A. S. Fast, Esq., for the Commissioner.
    Before MaRqtjette and Morels.
    This appeal is from the determination of deficiencies in income and profits taxes for the year 1917, and income taxes for the years 1918 and 1919, in an aggregate amount of $163,297.46, of which the taxpayer admits that approximately $108,000 is properly due.

      FINDINGS OP PACT.
    During the years 1917, 1918, and 1919, the taxpayer was the sole proprietor of a gas-engine factory and business, located at Springfield, Ohio, which was operated under the name of Superior Gas Engine Co. During the same years he was also the owner, except for five shares necessary for qualification of directors, of all the capital stock of the Superior Feed Co., a corporation of Memphis, Tenn., which was engaged in the manufacture of animal foodstuffs.
    Prior to 1910 the taxpayer had been engaged in the business of manufacturing cattle feed under the name of Louisiana Food & Products Co., and, up to January, 1910, had advanced money for that business to the net amount of $57,895.04.
    In 1911, the business theretofore conducted by the Louisiana Food & Products Co. was incorporated by the taxpayer, under the laws of Tennessee under the name of Superior Feed Co. All of its capital stock of $99,000 was issued to the taxpayer for $38,052.18, representing the tangible assets, and $60,947.82, representing good will, of the predecessor business.
    During the years from 1911 to and including 1919, the taxpayer, in the name and on the accounts of the Superior Gas Engine Co., advanced credits, by way of supplies and money, to the Superior Feed Co., the net indebtedness owing by the latter on December 31, 1919, amounting to $56,497.98. That sum was charged off the books of the Superior Gas Engine Co. under date of December 31, 1919, as a bad debt, and was claimed as a deduction in taxpayer’s return for 1919. By reason of the sums owing by it to the taxpayer for the money advanced and supplies furnished, the Superior Feed Co., througho'ut the years 1918 and 1919, had liabilities in excess of its assets.
    The Superior Gas Engine Co. continued to advance supplies and money to the Superior Feed Co., in the years subsequent to 1919. The balance of the account,, as it stood upon the books of the Superior Gas Engine Co., was:
    Jan. 1, 1917_$55,551.16
    Dec. 31, 1917_ 56,047.19
    'The account covered articles manufactured by the Superior Gas Engine Co. and sold to the Superior Feed Co. to the extent of a small but undetermined amount. The balance and greater part of the account consisted of advances for salaries, supplies, labor, taxes, etc., which the Superior Feed Co. owed and which were paid by it out of funds withdrawn by the taxpayer from the funds of the Superior Gas Engine Co. and advanced by him for the purpose, or were paid directly by the Engine Co.; it did not include any charges for goods manufactured by the Engine Co. and sold in the usual course of business.

      During the year 1918, the taxpayer, as sole endorser, paid to the Mad Kiver-National Bank promissory notes of the Superior Feed ■Co. which, with principal and interest, amounted to $34,701.71.. The loans were made by the bank upon the credit of the taxpayer and, the Superior Feed Co. being unable to meet the payments, the taxpayer did so in response to a demand upon him as endorser.
    The taxpayer charged off $17,701.71 of said amount in 1918 as a bad debt and claimed a deduction therefor upon his return for 1918.
    The earnings of the Superior Feed Co. were:
    1917_ $13,124. 93
    1918 (loss) 25, 062. 98
    1919_ 3, 262. 60
    1920_ 5, 021. 55
    1921 (loss) 100, 933.19
    1922 (loss) 21, 504.12
    1923 (loss) 2, 661. 97
    1924 (loss) 57, 989. 77
    During the years 1916 to 1918, inclusive, the taxpayer individually, and not in the name of the Superior Gas Engine Co., advanced funds to the Superior Feed Co., for use in its business and in addition to any investment in the capital stock of that company, in the total amount of $157,284, and received payment on account thereof in the sum of $34,000. With interest of $2,065.50 on the balance of the account, the net amount owing to the taxpayer on August 1, 1918, was $12,349.50.
    The balance sheet of the Superior Feed Co. as of December 31, 1918, showed assets of $180,273.47, including therein “ good will ” of $60,947.82. The liability side showed, as due to the taxpayer for •cash advances $124,349.50, and capital stock of $99,000, which, reduced by a deficit of $85,970.78 left a capital balance of $13,029.22.
    The balance sheet of that company as of December 31, 1919, showed assets of $245,442.83, including therein the good will item of $60,947.82. The liability side showed as due to the taxpayer for ■cash advances $124,349.50 and a deficit $82,708.18, leaving a capital balance of $16,291.82.
    Under date of October 31, 1920, action was taken by the Superior Feed Co. to increase its capital stock from $99,000 to $200,000. A book entry was made transferring to the surplus account $58,148.90 of the amount then owing to the taxpayer, and the balance of $101,-000 was transferred to the capital stock account. Authority for the increase in capital stock was not granted by the State of Tennessee until 1924.
    In May, 1925, all of the assets of the Superior Feed Co. were transferred to the taxpayer and he assumed liabilities represented by bank loans outstanding of about $116,000. The taxpayer then sold all of the assets to the Royal Feed & Milling Co. for about $111,000, which was paid in cash, and retained the liability on the bank loans.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Marquette

: The taxpayer had a successful business in the manufacture of gas engines. He became interested in the feed business and made loans to carry it on until he had so much money involved therein that he felt the necessity of taking it over to justify his investment through the exercise of his business ability in the extraction of the business from its financial difficulties. He organized the business as' a corporation in 1912. Thereafter, he carried on the corporation, of which he was the sole stockholder, advancing it funds, sometimes out of his individual account and at other times out of his business conducted as the Superior Gas Engine Co. The funds advanced, however they may have been carried as a matter of bookkeeping, were funds of taxpayer.

The Revenue Act of 1917 provided for an excess profits tax upon individuals engaged in business, and no provision was made for consolidated returns in a situation where a sole proprietor of one business owned or controlled substantially all the stock of a corporation- Upon the record, the two businesses must be treated as separate and distinct business units.

The taxpayer contends that the amount of $55,551.16, which represented the total sum advanced to the corporation, should be treated as accounts receivable of the engine business and included in the surplus of that business for invested capital purposes. While that sum may have been advanced by the taxpayer and the amount thereof set up on the books of the Superior Gas Engine Co., we can not disregard the fact that that name was merely one used by the taxpayer in his individual business. It was the taxpayer who advanced the money and not an entity separate and distinct from the taxpayer himself. As such, was it an advance by him as the owner of the engine business or as an individual? To a very small extent, the exact amount of which was indefinite on the record, the advances represented goods made by the Engine Co. and sold to the corporation. But the larger part of the advances represented the payment of corporate obligations, such as taxes,. salaries, and other business expenses. Some of the articles were purchased by the taxpayer for the gas-engine business and turned over to the corporation; others were purchased by the corporation and paid for by the taxpayer. As ⅛ appears to us, such advances were withdrawals from the engine business and personal loans by the taxpayer to the Feed Co. They were not in any true sense accounts receivable of the gas-engine business With that business alone is the question of invested capital concerned, and the action of the Commissioner disallowing the advances as accounts receivable of the engine business and as part of its invested capital was proper.

The next question relates to the deduction in 1918 of $17,701.71, which constituted part of the sum of $34,701.71 which the taxpayer was obliged to pay by reason of his liability as an endorser on the notes of the corporation. A portion only of a bad debt is not deductible under the Revenue Act of 1918. Appeal of Steele Cotton Mill Co., 1 B. T. A. 299; Appeal of The Murchison National Bank, 1 B. T. A. 617. We find nothing with respect to this deduction by the taxpayer which would take it out of the rule there announced, and the action of the Commissioner disallowing the same must be approved.

The remaining question relates to the deductibility in 1919 of the amount of $56,497.98, owing by the corporation to the taxpayer for advances by way of credits and money, as a bad debt. The corporation was at all times insolvent. The taxpayer knew it, but his repeated advances to the corporation evidence his expectation that the affairs of the corporation would thereby be eventually worked out. It is true that the liabilities of the corporation exceeded its assets and that it was technically insolvent, but the control of the corporation rested entirely in the taxpayer and its liabilities consisted principally of indebtedness to him. There were assets sufficient to reimburse the taxpayer in part, and upon the record the entire debt was not worthless and therefore was not deductible. Appeal of Winthrop Ames, 1 B. T. A. 63; Appeal of G. C. Krack, 1 B. T. A. 1119; Appeal of Portland Railway, Light and Power Co., 1 B. T. A. 1150. Furthermore, the amount of $56,497.98 was but a portion of the indebtedness owing by the corporation to the taxpayer and, for the reason stated above, part of a debt is not deductible.


author: Trammell:

text:
    Appeal of BUENA VISTA HARDWOOD CO.
    Docket No. 2603.
    Submitted October 26, 1925.
    Decided January 30, 1926.
    Upon the evidence, held, that the deduction allowed for the • amortization of facilities acquired for the production of vessels for the transportation of articles or men contributing to the prosecution of the war should be taken in 191S.

      P. M. MacCutcheon, C. P. A., for the taxpayer.

      J. W. Fisher, Esg., for the Commissioner.

      Before Graupner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income- and profits taxes for the fiscal year ended March 31, 1919, in the-amount of $1,056.03. The deficiency is due to the fact that the Commissioner disallowed a deduction, claimed by the taxpayer in its return, on account of the amortization or loss of useful value of machinery alleged to have been acquired for the purpose of producing articles contributing to the prosecution of the war.
    FINDINGS OF FACT.
    The taxpayer is a corporation organized under the laws of West Virginia, having its principal office at Marlinton. It was organized in April, 1918, and took over the business of the Buena Vista Hardwood Co., which was a partnership and had operated the business for some years. At the time of its organization it issued stock of the par value of $5,000 for mill and machinery of the former business.
    The corporation from the date of its organization was engaged in the business of manufacturing tree nails and had contracts with the United States Shipping Board Emergency Fleet Corporation for its entire output. These nails were used in the construction of wooden ships. After the signing of the Armistice in 1918, the contracts for the manufacture of the tree nails were canceled, except for 10 carloads of tree nails, which were manufactured under the terms of the-cancellation. The Emergency Fleet Corporation had no further use for tree nails, as no further wooden vessels were being built. In the fall of 1918, the corporation ceased to manufacture tree nails and permanently abandoned the mill and machinery as war facilities. For a few months after the cancellation of the contracts, the taxpayer continued to operate and saw lumber for other purposes, but made no tree nails, and only a portion of the mill and machinery was-operated. Efforts were made to sell the machinery and mill without success. The buildings were subsequently torn down and destroyed,, as they could not be sold, and approximately $250 was received from the sale of the tin roof of one of the buildings,, some wood which was cut from lumber in another building, and a small amount of frame lumber. The boilers and engines, sawmill and machinery could have-been used for an ordinary sawmill business, but they were located in a section where the timber had been previously removed, and there was no sale for such material in that section. These were abandoned.
    The machinery and equipment, which was acquired for the issuance of stock of the amount of $5,000 par value, had an actual cash-value at the time acquired of at least that amount. The above property had a residual value not greater than $3,000, the amount claimed by the taxpayer.

      DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Rule 50.
   OPINION.

Trammell:

A loss of useful value is not involved in this appeal. The deduction allowable, if any, is on account of the statutory amortization of war facilities. If the taxpayer is entitled to such a deduction, the question then arises as to the taxable year or year's in which the deduction should be allowed.

The taxpayer acquired the facilities after April 6, 1911, for the purpose of manufacturing tree nails. These were used in filling contracts with the Emergency Fleet Corporation for the construction of vessels. While the taxpayer did not construct or acquire vessels for the transportation of articles or men contributing to the prosecution of the war, the articles were used in the construction of such vessels. We have found as a fact that the facilities cost at' least $5,000, and that their residual value was not more than $3,000. The facilities upon which amortization is claimed were both acquired and abandoned for war purposes within the taxable year in question, and amortization of $2,000 is a proper and reasonable deduction in that year.


author: Geeen: SteRNI-iageN,

text:
    Appeal of AUTOMATIC TRANSPORTATION CO.
    Docket No. 2676.
    Submitted June 18, 1925.
    Decided January 30, 1926.
    1. Evidence held insufficient to establish value of assets acquired in exchange for stock.
    2. Where machinery is discarded as the result of changed business conditions, the taxpayer may deduct in such year the difference between the depreciated cost and the salvage value.

      Joseph A. Albrecht, Esq., for the taxpayer.

      Lee I. Park, Esq., for the Commissioner.
    Before Green and Morris.
    The Commissioner, after consideration of protests and claims in abatement, found an overassessment of income and profits taxes for 1917 of $2,114.66, and determined deficiencies in income and profits taxes for 1918 and 1919 of $9,372.61 and $6,711.24, respectively.
    Two errors are set out as the basis of the appeal. First, that the Commissioner did not allow, in his computation of invested capital, an item of $1,000,000 set up by reason of an exchange of stock of the par value of that amount for patents; and, second, that a deduction in the sum of $46,022.91, claimed for the year 1918, was erroneously disallowed for that year and allowed in the subsequent year.
    FINDINGS OF FACT.
    The taxpayer is a New York corporation, organized in 1921 to take over an Arizona corporation of the same name organized in dune of 1906. The original authorized capital stock of the taxpayer was $2,000,000, divided into 40,000 shares of a par value of $50 each.
    Prior to June, 1906, William C. Carr had invented certain automatic transportation devices and had made application for letters patent thereon. These transportation devices were systems of automatic freight carriers for use in factories, warehouses, and railway terminals. The inventions covered electrically driven trucks which would operate on the ground or floor or on tracks either on the floor or suspended from the ceiling or roof. The patents when issued were basic. At the time of the organization of the corporation, Carr had perfected 15 inventions, all relating to automatic transportation.
    The corporation was organized to acquire these patents and to manufacture and sell the devices controlled thereby. Prior to its organization, Carr interested in the patents the several individuals who subsequently became the incorporators, and they all agreed upon the payment that was to be made to Carr therefor. Shortly after the organization the patents were transferred to the company. In consideration thereof, the company agreed to pay $50,000 in cash, which was subsequently paid, and to deliver to Carr 20,000 shares of its corporate stock, which was done immediately.
    Instead of making.arrangements with a brokerage house to handle the sale of the remainder of the stock, the officers determined to offer it to the public through their own sales agents. Pursuant to this plan numerous small blocks of stock were placed in the hands of agents at the times and sold for the prices mentioned below:

    The first actual sale of stock was made on August 29, 1906. The sales of stock at the price fixed for the first block exceeded the authorized number. Sales at this price were stopped on March 1, 1901, by which time a total of 1,186 shares had been sold. The purchases were in small lots, varying from one or two shares to ten shares each, with an occasional purchase of a larger block. The total sales of stock amounted to 18,869 shares having a par value of $943,450. For these shares the company received the sum of $477,-995.50, or an average price slightly in excess of $25 per share.
    The taxpayer experienced great difficulty in convincing the buying public that its products were meritorious, and it was not until 1911 that its first sales were made. There were no profits from the date of organization to the date of these sales. Thereafter, it developed rapidly, until at the present time it does a large and lucrative business.
    Before the entrance of the United States into the World War the taxpayer entered into a contract with certain foreign governments to manufacture shells. Prior to April 6, 1917, it expended $62,809.97 in the purchase of machinery necessary for the performance of the contract. After the entrance of this country into the World War, the taxpayer manufactured shells for our Government, and it was necessary to purchase additional machinery to supplement that above referred to.
    All work on shells ceased on November 11, 1918. Thereafter the machinery was of no use, none of it being suitable for use in the manufacture of the company’s regular products. It was disconnected and removed from the shops with the intention of selling it immediately. Before the books were closed on December 31, 1918, all of such machinery was written down on the company’s books to its junk or scrap value, which, in the case of the lot of special machinery first purchased, was $5,528. Upon this machinery depreciation had been claimed and deducted for the years 1915, 1916, and 1917, in the total sum of $11,259.07.
    The taxpayer filed a claim for amortization in which was included, by error, the special machinery acquired before April 6, 1917. The claim, to the extent that it related to machinery purchased prior to April 6, 1917, was denied, and the amount is now for the first time claimed as a deduction against income. The machinery was sold 'in 1919 for $15,000, and the excess of this amount over the alleged junk value was reported as income for 1919.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, in accordance with Bule 50.
   OPINION.

Geeen:

We are unable to determine the value of the property received in exchange for the stock. Certain witnesses testified that the directors believed that the applications and patents, at the time they were acquired, were worth the par value of the stock issued therefor. The prices at which the stock was subsequently placed on the market and sold indicate that there was no firm foundation for such a belief. There were no earnings either previous to the acquisition of the applications and patents or within five years thereafter. The only evidence introduced which tends to prove value was that relating to the sale of the first 1,186 shares of stock at $12.50 per share. These sales were in very small lots. They afford no basis for a determination of the value of the 20,000 shares transferred to Carr. It is possible that such a block of stock, being 50 per cent of the total authorized capital stock, would be worth considerably more per share than shares which were sold in small lots, but it is probable that, if a purchaser could have been found for such a block of stock, it would have been necessary to reduce the price considerably below that asked for the stock in small blocks. We are not unmindful of the difficulties attendant upon proof of value in a case of this kind, but this Board can only determine values from the evidence. Here the relationship between the values of the applications and patents and the price paid for very small blocks of stock is too remote to afford a criterion for the measure of the value of one by the value of the other.

We have heretofore held, in the Appeal of Dilling Cotton Mills, 2 B. T. A. 127, that where machinery is discarded as the result of change in business conditions, the taxpayer may deduct in such year the difference between the depreciated cost and the salvage value. The rule there announced is controlling here, and so much of the deficiency as arises from the refusal of the Commissioner to allow such deduction is disapproved.

On reference to the Board:

SteRNI-iageN,

dissenting: I disagree with so much of the decision as allows the deduction as a loss in 1918 of any part of the cost of the property the use of which was discontinued in that year and which was sold in 1919.

James, LittletoN, Marquette, and Phillips concur in the dissent.