author: MuRdock:

text:
    The First National Bank of Boston, Special Administrator of the Estate of Mary B. Longyear, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 36438, 46583.
    Promulgated January 20, 1932.

      Harold >S. Davis, Esq., Francis V. Bar stow-, Esq., and B. Ammi Gutter, Esq., for the petitioner.

      James L. Baekstrom, Esq., for the respondent.
   OPINION.

MuRdock:

The decedent always made her income-tax returns on the basis of cash receipts and disbursements for a calendar year. She used this method in reporting her income for the year 1924. The first question is, Should an amount of $90,000, representing distributions which she received prior to January 1, 1924, from the executors of the estate of her deceased husband, be included in her gross income for 1924? The respondent concedes that the period of administration or settlement of the estate of the deceased husband continued throughout the period here involved. He points to the fact that the estate of the deceased husband had a fiscal year which ended March 31, 1924, and these distributions were income of that estate for that fiscal year. From these facts he argues that the beneficiary, who had a different taxable year from that of the estate, was required to return the amount received from the estate for her taxable year in which the taxable year of the estate ended, that is, for the year 1924. The principal trouble with this contention is that it finds no support in the Revenue Act of 1924, which controls the question of the petitioner’s income-tax liability for the year 1924. See section 219 of the Revenue Act of 1924. This was the kind of income mentioned in section 219 (b) (3). If, instead, it had been the kind of income mentioned in section 219 (b) (2), then the respondent’s contention would be correct, for section 219 (e) provides:

If the taxable year of a beneficiary is different from the estate or trust, the amount which he is required, under paragraph 2 of subdivision (b) of this section, to include in computing his net income shall be based upon the income of the estate or trust for its taxable year ending within his taxable year.

The fact that such a specific provision was made in this section of the act affecting the one kind of income and that there is no similar specific provision affecting the other, indicates very clearly that Congress intended that the kind of income here involved was to be reported by the beneficiary in accordance with the usual method used by her in reporting her income. That method was to report only cash received. Having received none in 1924, none had to be reported.

Section 219 (d) of the Revenue Act of 1921 provided that a beneficiary who had a taxable year different from that of the estate was to report, as income for his taxable year within which the taxable year of the estate ended, any income of the estate during the period of administration or settlement which the fiduciary was permitted to deduct. Thus, if this act were controlling in the present case, the contention of the respondent would be correct. However, as we have said before, not the Revenue Act of 1921, but the Revenue Act of 1924 is controlling here. Congress made a change in the later act from what it had provided in the earlier act. Due to this change some income may escape taxation, but this fact is immaterial. The provisions of the later- act are clear, and the method of reporting income on the cash basis is well established. The Commissioner erred in including the $90,000 in the decedent’s income for 1924.

In discussing the remaining question, which has to do with the right of the decedent to deduct certain contributions made in each year, we will describe, in part at least, the various exhibits attached to the stipulation. Mary B. Longyear was a party to two trust instruments dated January 18, 1928, referred to in the stipulation as Exhibit A. The one created a trust known as the Longyear Foundation. In the other she assigned $5,000 to trustees and provided that they should pay the income of the trust to the Longyear Foundation. She retained for herself alone the power at any time to revoke both of these trusts and to require the trustees to convey and assign to her all property held by them.

On February 18, 1924, she exercised this power by notifying the trustees to terminate the trusts and deliver the entire trust property to her. (Exhibit B.)

On February 18, 1924, she was a party to two new trust instruments. (Exhibit C.) The one created a trust known as the “ Eddy Historical Society.” In the other she assigned to trustees the property received by her from the revocation of the earlier trusts, and provided that they should pay the income of the trust to the Eddy Historical Society. She retained for herself alone the power at any time to revoke both of these trusts and to require the trustees to convey and assign to her all property held by them.

On April 5, 1926, she exercised this power by notifying the trustees to terminate the trusts and deliver the entire trust property to her. (Exhibit D.) •

On April 5, 1926, she was a party to two new trust instruments. The one created a trust known as the Longyear Foundation, and the other created a trust known as the Endowment Trust. In the latter she assigned to trustees $5,000 par value of bonds, being the property received by her from the revocation of the earlier trusts, and provided that these trustees should pay the income of the trust to the Longyear Foundation. She retained for herself alone the power at any time to alter, amend, cancel or revoke both of these trusts and to require the trustees to convey and assign to her all property held by them.

On July 21, 1924, she altered the Eddy Historical Society Trust.

On August 17,1927, and again on December 11, 1928, she executed amendments to each trust then in effect, the Longyear Foundation and the Endowment Trust. In the amendments made on the latter day she provided that the Endowment Trust was irrevocable and not subject to alteration or amendment, and also that the Longyear Foundation was not subject to revocation or alteration by Mary B. Longyear, but might be amended by two-thirds of the trustees.

The trust instruments dated April 5, 1926, and the amendments of August 17, 1927, and December 11, 19-28, are part of Exhibit E attached to the stipulation.

The petitioner claims that Mary B. Longyear had a right to deduct from her gross income certain contributions made by her in each of the three years. It bases its claim upon the following provisions of sections 214(a) (10) of the Revenue Acts of 1924 and 1926:

Sec. 214. (a) In computing net income there shall be allowed as deductions: *******
(10) Contributions or gifts made within the taxable year to or for the use of: * * * (B) any corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private shareholder or individual.

The contributions in question are not deductible under these sections of the revenue acts for a number of reasons, which become obvious upon an examination of the provisions of the various trust instruments. The stipulation shows that Mary B. Longyear created three pairs of trusts. Each trust, at all times material hereto, was revocable at the will of Mary B. Longyear. Thus, she could take to herself at any time the benefit of the net earnings of any or all of the six. The requirement that the trust be one “ no part of the net earnings of which inures to the benefit of any private * * * individual,” eliminates each of these trusts.

Parties may not stipulate a conclusion of law which it is the province of the Board to decide. Ohio Clover Leaf Dairy Co., 8 B. T. A. 1249; 9 B. T. A. 433; affd., 34 Fed. (2d) 1022; certiorari denied, 280 U. S. 588. When Mary B. Longyear revoked a trust the property was hers to do with as she pleased Her pleasure happened to be to transfer the property to a new trust. If the stipulation that “ none of the property comprising said trusts was received by Mrs. Mary B. Longyear for her personal use ” is intended to be to the contrary, we refuse to be bound by it. The stipulation offends similarly in another instance relating to the first point, but the facts stipulated lead us to the same conclusion which is stipulated. The stipulation is so drawn that we can not tell to which trust any certain contribution of 1924 was made. The same is true of 1926. This failure of proof is not very important. However, if any part of the contribution for either year was made to a trust revoked within the year, so that the money was returned to the donor within the year, the donor would certainly not be entitled to deduct the amount on her return for the year.

The principal purpose of one of each pair of trusts seems to have' been to hold property and pay the income therefrom to the other. The contributions were made to the latter, according to the stipulation. We may assume that each of the latter three was organized and operated for one or more of the purposes mentioned in section 214 (a) (10). But there were other purposes for which each was organized. The trust created on January 18, 1923, known as the Longyear Foundation, had as part of its purpose:

To pay the said net income or such part thereof as they may from time to time deem expedient to trustees under a certain declaration of trust entitled “Assignment and Declaration of Trust, Zion Research Foundation ” dated March 19, 1920, to be by said last mentioned trustees administered as part of the income of said last mentioned trust; and to apply said net income to such other charitable purposes as said Mary Beecher Longyear may from time to time during her life in writing or by her last will direct.

We do not know that the Zion Research Foundation Trust was one which met the requirements of sections 214(a) (10) of the Revenue Acts of 1924 and 1926, nor do we know that the other charitable purposes which Mary Beecher Longyear might direct would not be broader than those set forth in section 214(a) (10). Genevieve Tucker, 2 B. T. A. 796; Sophia G. Coxe, 5 B. T. A. 261; Adam Ortseifen, 14 B. T. A. 1403.

The operating trust created on February 18, 1924, was originally known as Eddy Historical Society, but on July 21, 1924, the name was changed to Longyear Trust. This trust provided that the trustees should devote the net income received to the maintenance and upkeep, including taxes and repairs, of Mary Beecher Longyear’s residence at 60 Leicester Street, Brookline, Massachusetts, and certain other houses owned by her; to furnishing all of the above mentioned houses; to caring for certain books then owned by Mary Beecher Longyear; to keeping her residence in condition; and to the maintenance therein of a competent housekeeper and staff of servants suitable and necessary for such an establishment. It also provided that the trustees should permit the Zion Research Foundation to use certain rooms, and should care for and clean those rooms and employ a certain individual at a salary of $8,000 as superintendent of grounds and garage and as general agent. The situation after April 5,1926, and up to the end of the year 1926 was not materially different. The Longyear Foundation of April 5, 1926, contained provisions similar to those which we have just enumerated. The houses and the books mentioned in these two trusts belonged to Mary B. Longyear and not to the trusts. She expressly provided that title in her should not be affected. One of the houses was her residence, in which she lived up to the time of her death. Thus, one of the express purposes of each of these trust instruments was to maintain her own residence, including the grounds and garage, in good repair, pay the taxes on this residence and employ and pay a competent corps of servants for the establishment. Cf. Herbert E. Fales, 9 B. T. A. 828; Frederic C. Leubuscher, Executor, 21 B. T. A. 1022; St. Louis Union Trust Co. et al., Executors, 21 B. T. A. 1201. These trusts, having these purposes, were not organized exclusively for the purposes mentioned in section 214(a) (10). Therefore, none of the contributions to these trusts were deductible.

We have not been informed as to the method of operation of any of the sis trusts here involved. This alone would defeat the petitioner’s claim, for we can not assume that the trusts were operated exclusively for charitable, religious, and like purposes to the exclusion of the other purposes for which they were created. After the last taxable year here involved Mary B. Longyear changed the two trusts then in existence so that she could no longer revoke either of them at will, but this circumstance, in our opinion, is immaterial in the decision of this case. There are other features of these trusts which take them out of the class mentioned in section 214(a) (10), but we see no reason to prolong this discussion, inasmuch as the decision on this point must be for the respondent in any event.

Reviewed by the Board.

Judgment will be entered under Bule 50.


source: Caselaw Access Project

author: Lansdon :

license: Public Domain

text:
    B. G. Heller, Petitioner, v. Commissioner of Internal Revenue, Respondent. Toby W. Swisky, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 40634, 42032.
    Promulgated January 20, 1932.

      Mavtrice W. Stoffer, Esq., for the petitioners.

      J. M. Leinenhugel, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent has asserted deficiencies for 1926 against B. G. Heller and Toby W. Swisky, in the respective amounts of $316.78 and $830.58. Only that part of each deficiency is in controversy which arises from the respondent’s action in refusing to permit the petitioners to carry forward as a “ net loss ” the amount of a loss sustained in 1925 upon the sale of corporate stock. The facts are stipulated.

In 1923, each of the petitioners purchased one-third of the outstanding capital stock of John W. Thomas and Company, Inc., and of the Thomas Holding Company, at a cost of $46,101.70, and on January 30, 1925, each sold such stock for $23,335, thereby sustaining a loss of $22,766.70. The Thomas Holding Company and John W. Thomas and Company, Inc., operated a ladies’ ready-to-wear clothing and accessories store at Minneapolis, Minnesota.

The business and occupation of each of the petitioners during the years herein involved, was the operation and management of ladies’ ready-to-wear clothing stores in various parts of the United States. Each of them was employed by eleven such stores and owned substantial capital stock in the corporation operating such store. Neither of them accepted employment from any corporation or firm other than those engaged in the ladies’ ready-to-wear clothing business and then only if he was a stockholder in the corporation which owned the business.

During the period involved herein, each of the petitioners was employed by the Thomas Holding Company and John W. Thomas and Company, Inc. Each of them was also employed by and a stockholder in Bentons’ Cloak and Suit Company, an Illinois corporation, which operated ladies’ ready-to-wear clothing stores at South Bend, Indiana, and Minneapolis, Minnesota. They were also stockholders in and employed by Newmans’ Cloak and Suit Company, which operated ladies’ ready-to-wear clothing stores at St. Paul, Minnesota, Oshkosh and Green Bay, Wisconsin, Waukegan and Decatur, Illinois, Des Moines, Iowa, Kansas City, Missouri, and Oklahoma City and Tulsa, Oklahoma. Each of the petitioners devoted part of his time to the supervision and management of each of these stores and drew a salary for such services from the corporation operating the store.

On their income-tax returns for 1925 the respondent allowed each of the petitioners a deduction of $22,166.70 as a loss from the sale of stock. If this amount is included in computing “ net loss ” for such year, the result will be a net loss of $3,728.54, for the petitioner, Swisky, and $2,288.17, for the petitioner, Heller.

In his brief the respondent argues that the petitioners’ losses in the circumstances of this proceeding resulted from an isolated transaction and, therefore, can not be considered as sustained in a business regularly carried on. We have many times held that losses resulting from investments in corporate stocks do not fall within the net loss provisions of the statutes. J. J. Harrington, 1 B. T. A. 11; Wm. J. Robb, 5 B. T. A. 827; Miller G. Belding, 19 B. T. A. 642. In our opinion, however, such decisions are not applicable to the facts herein stipulated. These petitioners are engaged in the business of managing and directing stores which sell a single class of merchandise. Incident to that business, and very closely related to it, they acquired stock in all of the concerns with which they were associated. To the extent of their investments in stock, they certainly assist in financing the concerns where they are employed. Their incomes were made up of the salaries they received for their services plus dividends on their stock.

In Elmore L. Potter, 18 B. T. A. 549, where the petitioner, for at least 28 years prior to 1924, was actively interested as owner, stockholder and/or bondholder and/or manager or managing director in various hotel enterprises conducted in the early years in his individual capacity as owner and, latterly, through the medium of corporations organized for the purpose, we held “ that for many years he was carrying on in a definite and distinct business, constituting a regular vocation, in which he employed jointly both his capital and professional knowledge.” Obviously, the situation of these petitioners is very similar to that of Potter. As stockholders, they contribute their capital to the various corporate enterprises by which they are employed. In connection with stock investments in one of the corporations through which they employed their professional knowledge they sustained the losses here in controversy. The record fails to disclose whether the petitioners organized the corporations in which they owned stock and by which they were employed; but we applied no such test in the Potter proceeding, supra, and it is not material, since it is established that they used both their capital and their knowledge in their business of managing stores. Cf. T. I. Crane, 17 B. T. A. 720; E. D. Anthony, 20 B. T. A. 5; Harry F. Harper, 20 B. T. A. 143; Glenn M. Averill, 20 B. T. A. 1196; and Washburn v. Commissioner, 51 Fed. (2d) 949.

In our opinion each of the petitioners herein is entitled to carry forward the loss sustained in 1925 in the computation of his tax liability for 1926, under the provisions of section 206(a) (1) of the Revenue Act of that year.

Reviewed by the Board.

Decision will be entered under Bule 50.

Marquette and SteeNhagen dissent.


author: TRAMMEll :

text:
    Coalinga-Mohawk Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 14974.
    Promulgated January 20, 1932.

      J. Gilmer Komer, Esq., Joseph G. Myerstein, Esq., and W. 8. Bens, Esq., for the petitioner.

      Henry A. Gox, Esq., for the respondent.
   OPINION.

TRAMMEll :

The sole question here is whether or not the ascertainment in 1921 that land purchased as oil-bearing land in 1918 for $80,000 was not oil-bearing property and thus worth only $2,000 represents a sustained loss of $78,000 deductible from 1921 income.

The respondent admits that during the taxable year the land was determined to contain no oil and was worth only $2,000, but contends that no deductible loss was sustained or realized in 1921, because throughout that year the petitioner continued to own or hold the legal title to the land and to derive income therefrom. The petitioner contends that its loss was fully sustained or realized in 1921, during which year (1) it determined that the land contained no oil, (2) abandoned or discarded the land from use in its business, and (3) reduced the value of the land on its books from $80,000 to $2,000, thus eliminating the value of the land in excess of $2,000 from its assets account.

In our opinion, the petitioner has not sustained a deductible loss in 1921. It purchased land for $80,000 and continued to hold the land throughout the taxable year. The fact that it had become reduced in value does not entitle the petitioner to a deduction. The petitioner did not acquire the land and the right to explore for oil separately, but merely purchased the land. It is not necessary to discuss a situation which might have been presented if the petitioner had purchased the land for a certain price and the oil rights separately. It is a well recognized principle that depreciation in the value of property does not give rise to a deductible loss. Any reduction in value of the property can not be taken as a deduction until the loss is realized by a closed transaction. It may well be that deeper drilling may have disclosed oil, or other minerals may have been found. Other events might have occurred which might have shown that the land was worth more than the purchase price, or at least not less.

In the case of Fred C. Champlin, 1 B. T. A. 1255, we considered a case presenting this same question. There we said:

Counsel for the Commissioner admitted the facts alleged in the petition and agreed that said facts may be considered as proven. Said petition, in substance, alleges that in April, 1918, the taxpayer purchased the fee simple title to eighty acres of land in Oklahoma and paid therefor the sum of $8,500, and that he made said investment on the belief that said land would produce oil. Soon after said purchase, test wells were drilled on adjacent tracts of land and all of said test wells proved nonproductive of oil, which result destroyed the value of taxpayer’s land for oil purposes. The value of the tract for farm purposes was only $2,500. The taxpayer had not sold or otherwise disposed of his fee simple title to the land in 1920.
There being no closed transaction to establish loss to the taxpayer, the determination of the Commissioner is approved.

See also A. J. Schwarzler Co., 3 B. T. A. 535, and Consolidated Brick Co., 17 B. T. A. 831.

It may well be that a taxpayer might purchase land which he considered suitable for the growing of a certain kind of crop and later discover that it was not suitable for that particular kind of crop, and that for other crops the land had less value, but we do not consider that this is such a transaction as gives rise to a deductible loss.

We do not consider that the cases relied upon by the petitioner, United States v. White Dental Manufacturing Co., 274 U. S. 398; Lewellyn v. Electric Reduction Co., 275 U. S. 243; and Niagara Falls Brewing Co., 281 U. S. 712, are applicable to this case. The case of a brewing company which acquired and used buildings for the purpose of its business and later, on account of prohibition legislation, found that it could no longer use them in that business, has no application to a case where a person purchases land for one purpose and finds that he can not use it for the particular purpose acquired and that it has less value than was originally put upon it or was contemplated. In this case the land was purchased as unproven oil property. The taxpayer took the chance of findiug oil. It could not be said that it was used in the business in order to make applicable the analogy between this case and the obsolescence cases of brewery property decided by the Supreme Court. The usefulness in the business was not terminated. If the property had no oil, it was never at any time useful in the oil business. The property was merely a potential oil reserve. The petitioner was in the “oil production business.” It does not follow that a tract of land which was bought in the expectation that future developments might disclose that it contained oil was actually being used in that business. It would doubtless have been used in the business if it had contained oil. This is a case where future events showed that the property could never be used in the business, rather than that it being so used was abandoned in that business.

There was here no unforeseen cause by reason of which any property was discarded. Nor do we think this case is similar to those cases in which leases, after discovery that no oil wa,s obtainable, were abandoned and given up.

We are of the opinion that the position of the respondent is correct.

Judgment will be entered for the respondent.


author: Smith:

text:
    Scovill Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 29854, 30238.
    Promulgated January 20, 1932.

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

      John D. Foley, Esq., and James G. Maddox, Esq., for the respondent.
   OPINION.

Smith:

1. The first question presented by this proceeding is whether the petitioner made a claim for the deduction of an amount representing amortization of war facilities provided for by paragraph (8) of subdivision (a) of section 234 of the Revenue Act of 1918, before June 15,1924. (See section 1209, Revenue Act of 1926.) Petitioner claims that it did; the respondent, that it did not.

Section 234 (a) (8) of the Revenue Act of 1918 permits a corporation to deduct from gross income :

In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, * * * there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities * * * as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. * * *

Corporations making tax returns under the provisions of the Revenue Act of 1921 were entitled to make a corresponding deduction from gross income “ for any taxable jrear ending before March 3, 1924 (if claim therefor was made at the time of filing return for the taxable year 1918,1919, 1920, or 1921).”

Section 1209 of the Revenue Act of 1926 provides :

The deduction provided by paragraph (9) of subdivision (a) of section 214 or by paragraph (8) of subdivision (a) of section 234 of the Revenue Act of 1918 may (notwithstanding any provisions of the Revenue Act of 1921) be allowed for the taxable year 1918, 1919, or 1920 if claim therefor was made before June 15, 1924.

Article 185 of Regulations 45 provides in part as follows:

Amortization period. — The amortization allowance shall be spread in proportion to the net income (computed without benefit of the amortization allowance) between January 1, 1918 (or if the property was acquired subsequent to that date, January 1st of the year in which acquired) and either of the following dates:
(a) If the claim is based on (1) of article 184, the date when the property was or will be sold or permanently discarded as a war facility; or (6) if the claim is based on (2) of article 184, the actual or estimated date of cessation of operation as a war facility.

The purpose and legislative history of section 234 (a) (8) of the Revenue Act of 1924 are set forth in much detail in G. M. Standifer Construction Corporation, 4 B. T. A. 525. See also Moore Investment Co., 2 B. T. A. 579; Walcott Lathe Co., 2 B. T. A. 1231. In Manville Jenckes Co., 4 B. T. A. 765, we said, referring to the above mentioned provision:

This provision of the statute is a relief provision, and, under the well known rules of statutory construction, if there is any doubt concerning its meaning, it must be liberally construed in favor of the taxpayer. * * *

In United States Refractories Corporation, 9 B. T. A. 671, we stated:

* * * The amortization provision is a relief measure, and should be liberally construed. A reading of the Act convinces us that the clause, “ if a claim therefore was made” refers to and modifies the phrase “reasonable deduction for amortization.” The making of the claim at the time of filing the return puts the Government on notice of the existence of the claim. Its duty then is to determine what constitutes a reasonable deduction. It is conceivable that a claim for a reasonable deduction for the amortization of war facilities set up as a lump sum with no itemization might he held to satisfy the provision that “ a claim therefor be made.” There is nothing in the Act specifically requiring itemization or forbidding amendment at any time before final settlement. We are satisfied that petitioner, having made claim for a reasonable deduction for amortization at the time of filing its return, may properly be allowed to amend its claim at the time of filing a petition with the Board, and may include items not listed in its original claim.

Clearly, under section 284 (a) (8) of the Kevenue Act of 1918 the petitioner is entitled to an allowance for amortization of war facilities in the computation of tax liability for the years 1918 and 1919. If it were not for the provisions of the 1921 Act and the 1926 Act, above quoted, no question could arise but that the petitioner is entitled to a deduction for amortization of war facilities in the determination of the deficiencies for 1918 and 1919. The respondent contends, in the first instance, that the petitioner abandoned its claim for amortization, so far as its return for 1918 is concerned, by having filed an amended return for 1918 without specifically claiming any deduction for amortization and, so far as the 1919 return is concerned, without claiming any deduction specifically for amortization in the return filed. The evidence of record shows, however, that the petitioner never abandoned its claim for an amortization deduction of its war facilities. It had made a claim for amortization in its original return for 1918 and that claim was under adjustment by the Commissioner at the time it filed the amended return for 1918. One Van Pelt, the head of the Amortization Section of the Income Tax Unit, permitted the petitioner to deduct from gross income in the amended return filed for that year, in lieu of any deduction specifically for amortization, the cost of certain additions to its plant and equipment which had been charged as expense items in its books of account. It was clearly understood between the representatives of the Commissioner and the petitioner that its amortization claim would be thoroughly investigated and that the final determination of tax liability would await such investigation and determination. The amended return for 1918 was filed in January, 1920, and at the same time or a little later the petitioner prepared and filed its original return for 1919. It was the recollection of the then secretary of the company, now the treasurer, that the 1919 return was prepared upon the same basis as the amended return for 1918. In other words, the cost of certain additions and improvements to its plant and equipment expensed upon its books of account were claimed as deductions from gross income in lieu of any specific deduction for amortization.

Tn the circumstances of this case we think it is immaterial to determine whether the petitioner made any claim for amortization of war facilities in its income and profits-tax return for 1919. In any event, by the regulations of the Commissioner (article 185, Eegulations 45), the amortization allowance is required to be spread over the amortization period in accordance with the net income assignable to each taxable period within such amortization period. In United States Refractories Corporation, supra, we held that it was not inconsistent for a petitioner before this Board to amend its claim for amortization allowance and to claim amortization upon other additions than those involved in the amortization claim filed with the Commissioner.

An inspection of section 1209 of the Revenue Act of 1926 shows that there is no requirement that a claim for amortization must be filed in connection with each of the tax returns for 1918, 1919, and 1920, in order that a deduction for an amortization allowance may be made in such returns. The provision was apparently put into the 1926 Act for the purpose of clarifying the provision contained in section 234 (a) (8) of the Revenue Act of 1921, namely, “(if claim therefor was made at the time of filing of return for the taxable year 1918, 1919, 1920 or 1921)?’ Congress desired to make it entirely clear that claims for amortization under the Revenue Act of 1918 were not to be denied merely because claim therefor was not made at the time of the filing of the return. The statute simply requires that a claim for amortization allowance must be made before June 15, 1924. The petitioner made its claim for amortization prior to that date and it has never abandoned such claim. The Commissioner has determined the amount of the additions made by the petitioner in 1918 and 1919 which are subject to an amortization allowance. The allowance should be spread over the amortization period beginning January 1,1918, in accordance with the stipulation of the parties.

2. The second point in issue is whether the petitioner is entitled to compute the depreciation allowances for 1918 and 1919 upon additions to plant and equipment made during those years at the same rates as upon like assets owned at the beginning of each year, or at only one-half of those rates, as contended by the respondent. At the hearing of this proceeding counsel for the petitioner stated:

The petitioner at no time maintained a reserve for depreciation upon its books, but instead credited the depreciation directly to the asset, and then applied the depreciation rates to that declining balance. In connection with the negotiations which have previously been referred to relating to 1917 and prior years, depreciation was one of the important questions and at that time parties agreed on the rates of depreciation applicable to the various properties 'and applied those rates to the declining balance at the close of the year 1917, for tbe year 1917. Tlie understanding was that for subsequent years the same procedure would be followed; therefore the depreciation has been computed by petitioner upon the declining balance at the close of each taxable year. * * *

The petitioner then adduced evidence to the effect that the total amount of depreciation provided upon its books of account for the period 1868 to January 1,1918, was $8,006,571.38, and that the residual value of depreciable assets at January 1, 1918, represented by cost less the depreciation which was charged directly against the assets, was $7,752,768.29. It was also testified that the depreciation charged off on the books of account for the four-year period 1915 to 1918, inclusive, was $4,616,983.20 in excess of the amounts deducted from gross income for depreciation on the tax returns for those years. The evidence was all directed to the point that the allowance for depreciation at rates allowed by the Commissioner upon the declining balances at the beginning of each of the years 1918 and 1919 and at one-half of those rates on additions in each of those years was not ample to cover depreciation and obsolescence in those years. It was contended that in view of the fact that the declining balances at the beginning of those years represented much less than the cost of the assets against which the rates were applied, the allowance made by the respondent was not adequate.

Although the petitioner’s original returns for 1918 and 1919 were offered in evidence and although those returns referred to depreciation schedules accompanying the returns, such depreciation schedules were not attached to the returns offered in evidence and we have no means of knowing the bases which the petitioner and the respondent used in computing the depreciation allowance. However, there is attached to the amended return for 1918 the depreciation schedule used by the petitioner in computing the depreciation allowance for 1918 in the amount of $1,684,313.74, which it is insisted in this proceeding is the correct allowance for depreciation for 1918. Although the testimony of the witnesses indicated that the declining balance on depreciable assets at the beginning of 1918 was $7,752,768.29, and that such declining balance was the basis for the computation of the depreciation allowance, it is to be observed that this is not the basis used by the petitioner in computing its depreciation allowance. The depreciation schedule referred to shows that the balance at January 1, 1917 (including $261,701.80 for land), was $9,440,865.11, to which were added additions in 1917 of $3,093,198.68, for the purpose of arriving at the total on which 1917 depreciation was calculated, namely, $12,534,063.79. The above figure includes $308,171.45 as cost of land, upon which no depreciation was claimed. From the $12,534,013.79 referred to above was deducted $87,327.99 for sales and scrap during 1917. To the remaining $12,446,735.80 was added $4,220,753.78 representing additions in 1918 for the purpose of arriving at the basis of $16,667,489.58 on which the 1918 depreciation allowance of $1,684,313.74 was calculated. It is seen from the foregoing that the depreciation allowance was not computed by the petitioner upon the declining balancé at January 1, 1918, plus the additions in 1918, but upon a substantially higher figure. The respondent has apparently computed his depreciation allowance upon the same basis as was used by the petitioner in computing its depreciation allowance. Apparently all that the respondent has done is to allow depreciation at the rates contended for by the petitioner upon the balances shown by the depreciation schedule at January 1, 1918, and to allow depreciation at one-half of those rates upon additions made during the year 1918. The reason for allowing depreciation upon additions made during the year at one-half the rates applied for the full year is that, in the absence of evidence to the contrary, the additions are presumed to have been acquired at the middle of the year and been subject, on an average, to wear and tear for only a six-months period.

Although the testimony of the witnesses was to the effect that the depreciation allowance made by the respondent was not adequate, we are of the opinion, upon an examination of the depreciation schedule attached to the 1918 amended return, that the testimony of the witnesses was upon the assumption that the depreciation allowance was based upon the declining balance as shown by petitioner’s books of account at January 1, 1918. Such, however, was manifestly not the fact.

We have heretofore held, in Robert P. Hyams Coal Co., Ltd., 1 B. T. A. 217, that “ Depreciation for 1918 and 1919 computed upon the average balance of depreciable property during each year rather than upon the balance at the close of each year was correctly so computed.” In that case the petitioner contended that “ additions made to the plant account during the year should be depreciated as though they had been owned by the taxpayer at the beginning of the year.” The Commissioner had based the depreciation allowance upon the average amount of the plant account throughout the year rather than upon the amount of the plant account as it existed at the close of the year. We sustained the Commissioner’s contention. For lack of proof that the depreciation allowance computed by the respondent in the instant proceeding is not adequate his determination of the depreciation allowance is sustained.

In the computation of the deficiences the respondent allowed depreciation in the amount of $368,617.37 for 1918, and in the amount of $217,653.78 for 1919, upon assets which were claimed by the petitioner and which were, according to the stipulation filed, the proper subjects of allowances for amortization of war facilities, provided the petitioner’s contentions with respect to the filing of a claim for amortization are sustained by the Board. Since in the opinion of the Board the petitioner timely filed a claim for amortization and was entitled to deduct an allowance for amortization of war facilities for both 1918 and 1919, the cost of such war facilities is not subject to any depreciation allowance. Such fact should be taken into account in the recomputation of the defieienees.

3. The third point in issue is whether the petitioner is entitled to deduct from gross income as an ordinary and necessary expense of carrying on its business the cost of certain work performed upon the Chestnut Hill dam and reservoir during each of the taxable years. The petitioner contends that these expenditures were necessary to insure to it an adequate supply of water during the performance of war contracts of 1918 and 1919, and that the effect of the expenditures was not to increase materially the asset value of its properties. The Chestnut Hill dam was located upon property of a corporation in which it was a stockholder, and not upon its own property.

The taxing statute permits the deduction from gross income of “All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” (Section 234 (a), Revenue Act of 1918.) The act prohibits the deduction in the computation of net income of “Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.” (Section 215 (b), Revenue Act of 1918.)

The line of demarcation between expenditures made in the operation of a trade or business and for improvements is not always sharply defined in accounting practice. In the instant case the petitioner did not consider in its accounting that the amounts expended were capital items; they were therefore charged to expense. It is to be noted, however, that they were not expenditures which would recur. For its own benefit the petitioner reconstructed the Chestnut Hill dam. It did not merely repair the dam. The work done was an improvement of the dam. The reservoir would thereafter afford an adequate supply of water for the petitioner for an indefinite term of years in the future, even if the plant should b*e operated on a 24-hour basis. In the light of such facts we are of the opinion that the respondent has properly regarded the expenditures in the reconstruction of the dam as capital expenditures and not as expenses. He has allowed the deduction during the taxable years of an amount for depreciation upon the dam. His treatment of the expenditures is approved and his action in disallowing the cost of the reconstruction as an expense item is sustained.

4. The final point raised by this proceeding is whether the deficiency for 1918 is barred by the statute of limitations. The respondent does not contend that any portion of the deficiency which has been determined by him for 1918 is collectible, except such portion thereof as was assessed on the March, 1924, list in the amount of $253,873.25. The respondent is protected in the collection of this deficiency by the surety bond filed in connection with the claim in abatement. Section 279 (a) of the Revenue Act of 1924. United States v. Barth Co., 279 U. S. 370.

Reviewed by the Board.

Judgment will he entered under Rule 50.


author: Teammell :

text:
    William M. Wailes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 37529.
    Promulgated January 20, 1932.

      J. Bond Smith, Esq., for the petitioner.

      Byron M. Goon, Esq., for the respondent.
   OPINION.

Teammell :

The petitioner contends that the good will of his business adhered to the premises which he sold in 1924, and that irrespective of the fact that the contract of sale did not specifically convey the good will, it nevertheless passed with the premises and he is therefore entitled, under the provisions of section 214 (a) (4) of the Revenue Act of 1924, to deduct its value on March 1, 1913. In the petition the value of the good will on March 1, 1913, is alleged to have been $18,162.40. However, in his brief the petitioner contends that its value was $14,931.40.

It does not follow that because the petitioner sold his building he also parted with his good will. It is well recognized that good will has no existence except in connection with a going business; it can not be separated from the going business to which incident. The seller who disposes of his manufacturing plant as a going concern necessarily parts with all those advantages which are inherent in conducting an established plant; in other words, parts with his good will. Pflegar Hardware Specialty Co. v. Blair, 30 Fed. (2d) 614. See also Brass & Iron Works v. Payne (Ohio), 33 N. E. 88; Merry v. Hoopes (N. Y.), 18 N. E. 714; Boggs v. Friend (W. Va.), 87 S. E. 873; and cases collected in 28 C. J. 738. But in this case there is no evidence that the petitioner sold a going business. He retained his business and did not sell it. He merely sold a building. The good will does not necessarily attach to a particular building aside from the business which is being conducted. If a merchant sells an old building and moves his business into a new, he does not dispose of his good will, but retains it. If the petitioner’s contention were true, if the building where a business is conducted were destroyed by fire and the business moved and continued at another place, the good will would be destroyed. The good will, while it inheres in the business and becomes a part of it, does not necessarily attach to the building subject to sale whenever the building is sold unless the business is sold in connection with the building. For the foregoing reason it is our opinion that the petitioner is not shown by the record to have sustained a loss in connection with the sale of his good will because he sold his building.

On the other hand, even conceding for the sake of argument that the petitioner had parted with his good will when he sold the building, we are not satisfied from the evidence as to what that good will was or whether it had any value on March 1, 1913. The petitioner relies upon the average annual profit of $2,439.72 for the period from October 1,1908, to March 1,1913, arbitrarily attributing to capital assets of an assumed value of $2,500 a return of 8 per cent, capitalizing the excess at 15 per cent to determine good will value. The evidence does not disclose whether the petitioner allowed himself a salary or reasonable compensation for services or whether any amount in respect therefor was deducted in determining the profits. There is no evidence as to what a reasonable compensation would have been or whether, if a reasonable amount had been deducted for compensation, there would have been any profits shown or any profits attributable to good will. Also, the evidence does not disclose what the average investment in the business was over the period. We do not know when the $5,000 was invested in the business or how long it had been invested on March 1,1913. The assumption of an average invested capital over the period preceding 1913 is not supported by the facts stipulated. Therefore, even if the petitioner as a matter of law had sold his good will, we are unable to determine that he sustained a loss, because we do not know what its value was on March 1, 1913, or whether it had any value on that date.

Judgment will be entered for the respondent.


author: Trammell:

text:
    Standard Conveyor Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33159, 36393, 40873.
    Promulgated January 21, 1932.

      W. H. Oppenheimer, Esq., for the petitioner.

      Brooks Fullerton, Esq., for the respondent.
   OPINION.

Trammell:

Respondent has disallowed for each of the taxable years before us, deductions taken by petitioner as representing exhaustion of the group of patents owned by it on March 1, 1913, and based on a valuation of $230,000 as of that date. Respondent here contends that the patents had no value as of that date, or, if they had a value, it is necessary for petitioner to show such value separately in the case of each patent and not collectively, in view of the fact that two of these patents expired in 1924, the second taxable year of the five years before us.

Upon careful consideration of the evidence adduced, we can not agree with either of respondent’s contentions. We think the evidence amply supports a finding of substantial value for these patents on March 1, 1913. Respondent calls attention to the prices at which petitioner’s stock sold prior to that date and its failure to' earn a profit as showing an absence of value in the patents. We do not think, however, that a low market price for petitioner’s stock during the lean years of operation before the value of its product was recognized, and while it was laboring under the handicap of general business depression, insufficient working capital and inefficient executive management, establishes the fact that after such period was over and it had begun to realize profits from operation, its patents were without value. On March 1, 1913, facts were known and other facts reasonably could be forseen or anticipated which clearly indicated that the patents were valuable. Petitioner introduced the testimony of three witnesses with long experience in patent valuation and qualified to express opinions with respect thereto. We think this testimony, together with other evidence in the record respecting the business of petitioner as of March 1,1913, its growth and reasonable expectation of future development, and the position it occupied among the manufacturers of conveyor systems by reason of its possession of these patents, amply supports the valuation of $230,000 placed upon the group of patents as of that date, and claimed by the petitioner.

As to the second question, it is evident that it is impossible to value these seven patents separately. ‘ Their value, as in the case of many groups of patents representing improvements on the prior art, appears largely to consist of their combination. We have held heretofore under such conditions that the reasonable allowance permitted by the statute for exhaustion of their value is by computing their average remaining life as of March 1, 1913, and exhausting their group value, as of that date, over this period. Simmons Co., 8 B. T. A. 631; Weser Bros., Inc., 12 B. T. A. 1394. In Union Metal Manufacturing Co., 4 B. T. A. 287, we said:

The respondent urges that a deduction, can not be computed and hence may not be allowed unless each patent is separately valued. If this were true it would effectively preclude, in many cases, the deduction which the statute contemplates, for the difficulty of patent valuation generally would become an impossibility. Congress is not to be supposed to have allowed a deduction and at the same time intended a method of computation so rarely available as to deprive most taxpayers of the deduction allowed. The statute expressly prescribes a reasonable allowance, and this we think is met by adopting the average method in this instance.

The deficiencies will be recomputed in accordance with the foregoing opinion.

Judgment will be entered wider Rule 50.


author: Love :

text:
    Ed Kasch and Theodora Kasch, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48293.
    Promulgated January 21, 1932.

      R. E. McKie, Esq., for the petitioners.

      Harold Allen, Esq., for the respondent.
   OPINION.

Love :

The issues, stated elsewhere, are briefly whether a partnership existed and whether any part of the deficiencies is due to fraud.

There was some discussion in the briefs as to whether in any event a minor could become a member of a partnership in the State of Tesas, and also whether the alleged partnership was one between petitioners as representing one combined two-thirds interest and Milton as representing a one-third interest, or whether it was a partnership between the three members of the family with each member representing a separate one-third interest.

We do not question the proposition that a minor may become a member of a partnership in Texas. The law of partnerships is largely embraced in the law of contracts. And it is now well established in Texas, as well as in most other jurisdictions, that a minor’s contract is not void, but voidable only at the instance of the minor; and, if not so avoided, it is binding upon the other contracting! parties. Weatherford v. McFaddin, 51 S. W. 548; Peck v. Cain, 63 S. W. 117: and Brown v. Bank, 88 Texas 265. The Texas courts have also held that a parent may emancipate his child during minority by permitting the minor to engage in business for himself, or by contracting to pay him compensation for his services. See Granrud v. Rea, 59 S. W. 841; Duveneck v. Kutzer, 43 S. W. 541; and Washington v. Washington, 31 S. W. 88. In the latter case the wife of a deceased minor son sued her husband’s father to settle a partnership alleged to have existed between her deceased husband and his father. In the opinion the court said:

Should the suit he continued as one solely to settle the partnership, and the evidence be the same as here presented, we think the question as to whether appellant (the minor’s father) had emancipated his son, would be unimportant, and need not be submitted to the jury. If appellant actually formed a partnership with his minor son, we see no reason why he would not be bound by such agreement.

As to whether the alleged partnership consisted of two or three separate interests, it is our opinion that Milton was not a partner with his parents on either basis. The conversations he had were largely with his father, although some of them were in the presence of his stepmother. It is our opinion after a careful study of all the evidence that the father never intended, at least during the taxable year here in question, to permit Milton to exercise any of the ordinary rights and incidents of ownership over his alleged one-third interest in the profits. Those rights and incidents were retained very much by the father. Although it can not be disputed that after the execution of the trust instrument in 1930 Milton had an equitable interest, if not a legal title, to an undivided interest of the value of approximately $80,000 in all the property held by Ed Kasch in his own name, yet, to all the property involved in that trust estate, Ed Kasch held the record title, and retained complete management and control over such property until the year 1947, in which year Milton is to reach his fortieth birthday. In view of the evidence and what we have said in John W. Graham, 8 B. T. A. 1081 (in effect affirmed by the Seventh Circuit on November 11, 1930, 44 Fed. (2d) 566); and T. L. Tally, 22 B. T. A. 712, we do not think that for the purposes of section 218 of the Revenue Act of 1926 a partnership existed between petitioners and their minor son during the fiscal year ended May 31, 1925.

It does not follow, however, that petitioners were guilty of fraud. Section 275 (b) of the Revenue Act of 1926 provides:

If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.

Section 601 of the Revenue Act of 1928 provides in part as follows:

In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, where no hearing has been held before the enactment of the Revenue Act of 1928, the burden of proof in respect of such issue shall be upon the Commissioner.

The hearing in the instant proceeding was held after the enactment of the Revenue Act of 1928. In assuming the burden the respondent offered the testimony of two internal revenue agents who for about three weeks during July, 1926, were examining the books of account and records kept by petitioners in connection with the seed business. The substance of their testimony was that the books “ had been kept with comparative accuracy ”; that they had never seen Milton about the place of business; and that if the entry on page 61 of the journal charging Kasch with two-thirds of the profits for the taxable year and crediting Mrs. Kasch and Milton with one-third each was recorded on the books at the time of the examination, the agents did not see the entry. Although we have found from the evidence that the alleged partnership did not exist, the evidence fails to show that the attempt to form the partnership and the reporting of the income on that basis was due to fraud with intent to evade tax. The penalites proposed by the respondent are, therefore, disallowed.

Judgment for deficiencies of $5,798.50 and $5,7J¡£.9S against Ed Kaseh and Theodora Kasch, respectively, will be entered.


author: Van Fossan:

text:
    Elizabeth D. Smith, I. Noyes Smith, and Kanawha Banking & Trust Company, Executors of the Estate of I. N. Smith, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 39291, 49668.
    Promulgated January 21, 1932.

      Hawthorne D. Battle, Esq., for the petitioners.

      F. B. Shearer, Esq., for the respondent.
   OPINION.

Van Fossan:

The first issue is whether or not one-sixth of the distributable income of the so-called Eothwell lease trust for each of the taxable years was the income of I. N. Smith, the decedent, or the income of three of his children. The determination of the question depends on whether the assignment of July 4, 1921, accomplished the transfer of a property right from which income arose or whether it was merely an assignment of future income. J. V. Leydig, 15 B. T. A. 124; affd., 43 Fed. (2d) 494; J. T. Browning, 16 B. T. A. 485; Hazel T. Power, 23 B. T. A. 428.

The respondent concedes in his brief that the instrument dated December 29, 1927, which is set forth in full in the findings of fact, is a valid assignment by the decedent to his three children of all the decedent’s right, title and interest in and to the funds and properties in question; that such assignment should be given effect; and that decedent was not liable for tax on any portion of the income for the year 1928. We concur in this view.

Eespondent urges, however, that the first assignment, that of July 14,1921, did not accomplish the same result, and points to variations in language as supporting the distinction he asks us to draw. We are unimpressed by respondent’s line of reasoning and can not agree that the earlier document fails of purpose, whereas the latter admittedly succeeds. The phraseology of the latter paper is fuller, but, when read as a whole and related to the present subject matter, no more comprehensive than that employed in the former. We believe both to be valid and effective for accomplishing the declared purpose, the second assignment emphasizing the intention and effect of the first. It will be borne in mind that before the dissolution of the Eothwell Coal Company the decedent, as a stockholder, owned a one-sixth interest in that company, while after the dissolution his only interest was a one-sixth interest in the distribution of assets remaining after payment of debts and liquidating expenses. The company was dissolved in 1919, while the assignment took place in 1921. Therefore, when decedent assigned and set over to his children “ all my interest in the distribution of funds arising from the property formerly owned by the Eothwell Coal Company ” he transferred everything he had, namely, his property right in any distributions however arising. Nothing was added when in the second document, that of 1927, he used the words, “ all my right, title and interest in and to the funds and properties formerly owned by the Eothwell Coal Company * * * and all my right to a distributive share of the monies of said trust whether derived from income or sales of said properties.” The latter phrasing was more detailed, but not more comprehensive.

While the conclusion above reached by study of the language of the two assignments effectively disposes of the principal and determinative issue of these proceedings, it may not be amiss to call attention to other facts revealed by the evidence. The first assignment was formally executed, consistently recognized and enforced and its validity insisted on by decedent in the drawing of the second assignment. The beneficiaries of the assignment were advised of its execution and received and accepted the benefits. The 1927 assignment was suggested by the attitude of the income tax unit and by its terms declares its purpose to be the effectuation of the original intention.

We are of the opinion that the original assignment was an effective legal transfer of a property right, not a mere assignment of income. By such transfer decedent parted with all right, title and interest in and to any share in the distribution of remaining assets of the coal company, however derived. The beneficiaries thereupon became chargeable with tax on any income so received, which taxes have been paid.

The conclusion above announced makes unnecessary a consideration, of the second issue.

Eeviewed by the Board.

Decision will be entered wnder Rule 50.

Goodrich took no part in the consideration or decision of these proceedings.


author: Lansdon:

text:
    Eugene C. Eppley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 29191.
    Promulgated January 21, 1932.

      R. M. O^Eara, Esq., for the petitioner.

      Byron M. Goon, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner concedes that during the periods involved he operated the five hotels which produced the disputed income; also, that he conducted such business as his own, but contends that, inasmuch as the courts subsequently held that the title to such properties was, at all times, in the hands of the Nebraska Hotel Company, it follows, as a matter of law, that all of such proceeds of operation belonged to that corporation. In support of his contentions the petitioner has cited numerous decisions of this Board and of the courts holding that income follows ownership and that it is taxable against the owner of the property which produced it. In this proceeding the property in question produced no income. Here we are dealing with the earnings of a business carried on by the petitioner, in which that property was employed. In such a case the property is merely incidental and its ownership is in no way related to the ownership of the business or the income therefrom. Had the petitioner purchased these hotels as going concerns, with credit, good will and other intangible income-producing incidents, the situation might be different; but as we understand the facts in this case, nothing but bare physical property, consisting of hotel sites, with buildings, furnishings, and some equipment, figured in the transactions we are here concerned with. The petitioner went into possession of such property in good faith, and, although later held to be a trespasser, holding under a void deed, we are of the opinion that the proceeds of the business belonged to him and that he was chargeable to the true owner for no more than reasonable rental upon the property, with rights of subrogation for taxes paid, if any. Crawford v. Galloway, 29 Neb. 261; 45 N. W. 628; Carter v. Brown, 85 Neb. 670; 53 N. W. 580; Taylor v. Roniger, 147 Mich. 99; 110 N. W. 503; and Millard v. Truax, 73 Mich. 381; 41 N. W. 328.

The business which produced the income in this case belonged to the petitioner. He created it and conducted it during all of the time in question as his own, collecting and retaining all of the profits derived therefrom. He was liable, therefore, to pay the tax on this income, over which he was thus exercising ownership and control as and when received, regardless of a possible subsequent liability to answer in damages to the owner of the property. The reasons for this rule are stated by the United States Circuit Court of Appeals for the Sixth Circuit, in its opinion rendered June 30, 1931, sustaining a decision of this Board, in Ford v. Commissioner, 51 Fed. (2d) 206, in the following language:

* * * If taxes regularly assessed could be Invalidated, an indefinite number of years later, by a consent judgment purporting to vacate the title of the taxpayer to the fund he had reported as income, the necessary system of tax collection would be much impaired. The true normal criterion to he applied in this class of case is the actual receipt and retention during the year in question of what was then considered to he income, not whether the taxpayer exposed himself to possible personal liability. [Italics supplied.]

Therefore, consistent with those views, we hold that the respondent correctly determined that the proceeds derived by the petitioner from the operation of the five hotels in question constituted taxable income to him for the years received, and that the petitioner’s first assignment of error must be denied. Ford v. Commissioner supra; Topeka Flour Mills Co., 12 B. T. A. 147; Lucas v. North Texas Lumber Co., 281 U. S. 11; 50 Sup. Ct. 184.

The record fails to show that the petitioner owned any interest in these hotel properties which would form the basis under the statute for a deduction on account of depreciation. Brevoort Hotel Co., 1 B. T. A. 132 and Weiss v. Weiner, 279 U. S. 333. The interest payments were made in 1921 and 1922, on account of the petitioner’s first contract with the receiver of the State court, which involved the purchase price of a group of mixed assets of which these hotel properties formed only a part; and which contract was subsequently declared void by the courts. The petitioner contends, however, that, inasmuch as he was bound under his contract with the receiver to make the payments provided for pending the court proceedings referred to, such installments, when due, constituted debts, within section 214 (2) of the 1921 Act, in virtue of which these interest payments were deductible in the years made. It is true that the petitioner made these payments in good faith under the terms of a contract which he believed binding, but since no title passed to him in the transaction, they were without consideration and refundable in law, as well as under the “ status quo ” provision of such contract and, not being “ unconditioned obligations to pay,” they were never debts within the provisions of the revenue acts. In re Emil Weitzner, 12 B. T. A. 724; W. S. Gilman, 18 B. T. A. 1277; affd., 53 Fed. (2d) 47. Cf. Inland Products Co., 10 B. T. A. 235; affd., Inland Products Co. v. Blair, 31 Fed. (2d) 867.

The petitioner’s sole contention in respect of the amounts of $21,567.85 and $15,366.55 paid in 1921 and 1922 is that they were paid as interest on indebtedness and, therefore, are proper deductions from his taxable income in such years. It might be argued, however, that while not allowable as interest for the reasons which we have set out above, they may be regarded as charges against the income realized from the operation of the hotel business by the petitioner and so included in deductions for ordinary and necessary expense. It is clear that in the circumstances the petitioner was accountable to the bankrupt corporation for a reasonable rental for the use and occupancy of the property to which he had no title, but the amounts paid as interest on the deferred purchase money installments can not be regarded as payments of rentals for the use of the property. Petitioner, himself, recognized that his gross income from the operation of the hotels was subject to reasonable charge for use and possession and in his proposal to purchase, which was finally accepted by the receiver and approved by the court, he fixed and proposed to pay that charge in the amount of $62,500. It may well be that such amount is deductible from operating income rat-ably over the term of petitioner’s operation of the hotel properties as a trespasser, since it was included in arriving at the amount of $957,500 which Eppley finally paid in compromising and settling the whole controversy, but this question is not before the Board and no decision thereon is necessary. In these circumstances, however, we are of the opinion that the amounts paid as interest in 1921 and 1922 can not be included in expenses incurred by the petitioner in operating the hotel properties.

Reviewed by the Board.

Decision will he entered under Rule 60.

Maeqtjette, Murdock, and Goodeich concur in the result.


author: Smith: Murdock,

text:
    Old Mission Portland Cement Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 38853.
    Promulgated January 21, 1932.

      George E. H. Goodner, Esq., and Frederich G. Rohwerder, G. P. A., for the petitioner.

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

Smith:

The principal issue for our determination is the fair market value of the petitioner’s limestone deposits, designated as the Barbee, Underwood, and Flint deposits, on March 1, 1913, which the petitioner acquired prior to that date in the manner set forth in our findings of fact. The facts relating to the acquisition of these properties are not in dispute, and the petitioner concedes the correctness of the respondent’s determination of the estimated tonnage on the basic date. The respondent determined the March 1, 1913, value of these deposits to be $63,121, estimated the tonnage thereof at 1,700,000 tons, and allowed depletion deductions at the rate of 3.713 cents per ton upon the stone removed during the taxable years 1923 to 1926, inclusive. The petitioner claimed deductions for depletion upon its income-tax returns for the taxable years under consideration at the rate of 20 cents per ton, which rate is explained on brief as “ a charge spread over all its holdings and was not restricted to the Barbee, Underwood and Flint deposits.” The petitioner contends that the March 1, 1913, value of these deposits was not less than $1 per ton, and in support of this valuation offered opinion evidence by three men experienced in the cement industry.

The petitioner’s first witness, Ira Judson Coe, testified that he had been interested in California limestone properties since 1903 and that as a consulting engineer he had examined practically all such deposits in that State. Between 1904 and 1906 he examined the properties involved in this proceeding, and, finding them suitable for cement production, recommended operations thereon. On direct examination Coe stated that in 1906 he valued the limestone in place on these properties at $1,000,000, and later stated that he probably did not place a valuation upon the properties at that time, but made a recommendation as to “the value, or I would not have recommended the investment.” The interests that he represented put about $300,000 into the development of these properties at that time,, and, according to Coe, a total of about $1,300,000 was expended for the construction of the cement plant and the development of the properties before 1913. From a consideration of all of his testimony it is difficult to determine whether he valued the properties ' at $1,000,000 in 1906 or merely found that they were of such a nature as to warrant an investment of $1,000,000. In 1905 or 1906 he procured an option on the Sky Blue Marble Quarries near Riverside and Los Angeles, California, for the Henshaw Brothers. In making his examination of these properties Coe made 23 diamond drill holes and tunneled the deposits to determine the tonnage, which he estimated at 2,000,000 tons. He recommended the construction of a cement plant and the operation of the Sky Blue properties. The option was exercised and the Sky Blue properties acquired for $55,000 and turned over to the Riverside Portland Cement Company. Coe stated that the Riverside plant for the operation of the Sky Blue properties cost about $1,000,000 and was about the same as the plant which was started in 1906 by the San Juan Portland Cement Company for the operation of the Barbee, Underwood, and Flint deposits. Shortly before the hearing in this proceeding in February, 1931, Coe computed the March 1, 1913, value of the Barbee, Underwood, and Flint deposits, which he estimated at 2,000,000 tons, by the use of figures on the estimated (not actual) cost of 82*4 cents for manufacturing a barrel of cement at the Riverside plant in 1906, a selling price of $1.50 per barrel for the cement, an estimated gross profit of 67% cents per barrel of cement or $2.16 per ton of raw material, or a total estimated gross profit of $4,320,000. The remainder of his computation is as follows:

Present value of deposits based on 10 year life and discount 'factors of 8% and 4% (Hoskold’s Table) before deducting cost of plant,
$4,320,000. X .6124_$2, 645,568
Deduct:
Estimated cost of plant- 1,000,000
Total value of deposits-$1, 645, 568
Value of deposits, per ton- $0. 822784

Coe did not value the particular properties with which we are here concerned either in 1906 or 1913, and his testimony shows no familiarity with these properties at or near the basic date. In fact, he has not examined these properties since 1907. His computation based on the Riverside properties might have more probative value if the comparison had been based upon actual instead of estimated costs of manufacturing cement. Coe stated that there was not much change in the value of limestone deposits in California between 1906 and 1913 and that any value determined in 1906 would hold good in 1913, and yet be stated that the Sky Blue properties, with the same estimate tonnage as the Barbee, Underwood, and Flint properties, cost only $55,000 in 1906. At that time both properties were undeveloped and may be considered comparable.

Herbert Coffman, petitioner’s second witness, has had about 30 years experience in the cement industry as a chemist and executive officer. His first contact with the petitioner’s properties was in 1916, when he made an analysis of some samples of the limestone in these deposits. Between 1907 and 1914 Coffman was chief chemist for the Riverside Portland Cement Company. He stated that the petitioner’s properties could have been as successfully operated as the Riverside properties, that the Riverside Company made a profit of $1,815 per ton before deducting depreciation at the rate of 25 cents a ton, or a profit of $1,565 per ton of raw material, and that the limestone in place was worth at least one-half of this amount, or 78 cents per ton. On cross-examination it was shown that Coffman did not know the methods used in computing costs or the actual profit per ton at the Riverside plant, and that he had never checked the figures as to costs in the cement industry. His opinion of value was based upon assumptions of plant costs, depreciation, cost of manufacturing and selling price of cement, and not actual costs at the Riverside plant.

F. S. Richards, petitioner’s third witness, has had many years of experience in the cement industry in the United States and Australia, but had never seen the properties involved in this proceeding until 1923. His testimony was based entirely upon an historical study of conditions in the cement industry in California, and not upon actual experience and observation of conditions at or near the basic date. Richards studied the records of the petitioner’s operations after production was begun in 1918, from which he computed a value for the limestone deposits with which we are here concerned. He stated that the valuation so determined as of 1918 would be the same as the valuation as of March 1,1913, since there were no operations on these properties between 1913 and 1918, and the general state of the cement industry during that period would not affect the valuation. Although he detailed much information about the development and use of cement in California building construction following the San Francisco earthquake, the impetus to the development of that section by the opening of the Panama Canal, transportation costs and differentials in freight charges, etc., he failed to mention the effect, if any, of conditions produced by the World War on the cement industry and particularly upon the value of petitioner’s limestone deposits. Even assuming, but not deciding, that his valuation as of 1918 was correct, that valuation should be discounted by reason of the unusual conditions tending toward inflated values then prevailing. Cf. Bogle & Co. v. Commissioner, 26 Fed. (2d) 771, 772.

Eichards testified that it is difficult to determine the actual tonnage of a limestone deposit in California, due to the lay of the rock, the strata of which may have been disrupted by physical changes in the land, and, further, that no estimate of the tonnage in a deposit is worth anything until it is backed up by definite prospect work. Although he did not explain just what he meant by “ definite prospect work,” neither his testimony nor that of the other witnesses reveals a definite prospecting of the deposits involved in this proceeding at or near the basic date, or at any other time. The first witnesses used an estimated tonnage of 2,000,000 tons, while Eichards used the respondent’s determination of 1,700,000 tons in computing valuation. Shortly before the hearing, Eichards prepared a statement showing the total tonnage removed from the Barbee, Underwood, and Flint deposits to be 1,700,000 tons, and the revenue for the years 1918 to 1928, inclusive, before depletion and depreciation in the amount of $3,715,959.42, to which he applied “Discount factor Hoskold’s 8 & 4 for 11 years .589748,” in determining a discounted value of $2,191,-479.62, “ Less one-half of plant cost and improvements $675,059.79,” or a net valuation of $1,516,419.83 for these deposits. This last sum divided by 1,700,000 tons, Eichards stated gave the limestone in place a value of 89.2 cents per ton. It is to be noted that this valuation is based upon revenue derived from these deposits during the postwar period and not upon expected profits estimated prior to operations (see Reinecke v. Spalding, 280 U. S. 227, in re discounting revenue to arrive at a March 1, 1913, value for depletion purposes). This witness did not know of any sales of limestone properties in the United States on the basis of a computation by Hoskold’s formula discounting expected profits from the sale of manufactured cement. Although Eichards computes a value of 89.2 cents per ton for the limestone in these deposits as of 1918, which he states would be the same value in 1913, he also tells us that in 1920 and 1921 the petitioner purchased limestone rock in place for 10 cents a ton and acquired a lease in 1927 for quarrying limestone at a royalty of 10 cents a ton. Such sales in 1920 and 1921 are not consistent with a 1918 valuation of 89.2 cents per ton, even after considering possible factors such as quarrying and transportation conditions and the available tonnage, etc.

On brief the petitioner argues that the testimony of these witnesses overcomes the prima fade correctness of the respondent’s determination and that this evidence supports a valuation of approximately $1 per ton, citing Russell v. Commissioner, 45 Fed. (2d) 100, wherein the Circuit Court of Appeals for the First Circuit said:

While there is a presumption that the Commissioner’s findings are correct, Avery v. Commissioner (C. C. A.) 22 F. (2d) 6, 66 A. L. R. 1277, when it appears, as in this record it does appear, that the methods pursued by the Commissioner were mathematically and legally erroneous, that presumption no longer avails. New York Life Ins. Co. v. Ross (C. C. A.) 30 F. (2d) 80, 82.

There is no contention here that the respondent’s determination of the depletion deductions is mathematically erroneous and we do not think that the record shows that determination to be legally erroneous. The only evidence offered by the petitioner to refute the respondent’s determination is the opinion testimony of these witnesses, which has been carefully considered. Such evidence is entitled to consideration, but, as the Circuit Court of Appeals for the Sixth Circuit said in a recent decision, Tracy v. Commissioner, 53 Fed. (2d) 575, affirming our decision at 15 B. T. A. 1107:

B. T. A. 1107:
* * * while the opinions of experts are competent and often very helpful, such evidence is not considered binding upon the tribunal before which it is produced, at least not to the extent that such tribunal is bound to follow it if contrary to the best judgment of its members. Anchor Co. v. Commissioner, 42 F. (2d) 99 (C. C. A. 4); Am-Plus Storage Battery Co. v. Commissioner, 35 F. (2d) 167 (C. C. A. 7). * * *

In Anchor Co. v. Commissioner, 42 Fed. (2d) 99, is the following:

* * * Such evidence is competent, but it is not to be blindly followed. It should be weighed by the Board in the light of the other facts developed in the case and of the general knowledge and experience of the members, and is by them to be given only such weight as in the light thereof may seem to be just and reasonable. The Conqueror, 166 U. S. 110, 131, * * *; Head v. Hargrave, 105 U. S. 45, 49 * * *; Am-Plus Storage Battery Co. v. Commissioner (C. C. A. 7th) 35 F. (2d) 167, 169.

See also Balaban & Katz Corporation v. Commissioner (C. C. A., 7th Cir.), 30 Fed. (2d) 807; Am-Plus Storage Battery Co. v. Commissioner, 35 Fed. (2d) 167; H. H. Blumenthal, 21 B. T. A. 901.

The record is not clear as to whether witness Coe valued the properties in question in 1906 or 1913, or in both of these years. The valuations of the other witnesses were made approximately 18 years after the basic date with which we are here concerned. The March 1, 1913, fair market value of these limestone deposits must be determined in the light of facts then known or then reasonably to be anticipated. J. J. White Lumber Co., 24 B. T. A. 274. None of the witnesses has adequately shown a knowledge of the petitioner’s limestone deposits on or about the basic date to support his valuation. Each testified to a retrospective valuation which is doubtless “ colored by subsequent prosperity ” of the cement industry. Bogle & Co. v. Commissioner, supra. As we said in E. Louis Jacobs, 20 B. T. A. 529, 535: “ * * * The longer the period which has elapsed since the date as of which value is expressed, the less reliable is the opinion of value likely to be.”

It was within the province of the petitioner to show its actual investment in these properties, which would or would not support the claimed valuation. The allowance for depletion is, after all, a return of capital arising out of a gradual sale of the properties. Lisk Manufacturing Co., Ltd., 15 B. T. A. 1048; United States v. Ludey, 274 U. S. 295. The undisputed facts of record show that these properties, together with a partially completed cement plant and the large acreage designated as the Chittenden Ranch, were- acquired in 1912 by the petitioner in exchange for its stock of the par value of $1,700,000, but no value has been established for this stock and no attempt has been made to allocate such value to the several properties so acquired. Such facts would aid our determination. The information submitted in connection with Form F filed with the Commissioner in 1922, in substantiation of petitioner’s increase of its claimed depletion deductions from 10 cents to 20 cents per ton, does not support the valuation now claimed by the petitioner. It is to be noted that the estimates and computations submitted in connection with Form F are based upon the tonnage requirements of the mill at its 1922 capacity. There is nothing in this data that shows with any degree of certainty the relevent facts known or reasonably anticipated at or near the basic date with which we are concerned.

The determination of the fair market value of any property is largely a matter of judgment and various theories of valuation are useful, only so far as they support a result consonant with sound judgment. Portage Silica Co., 11 B. T. A. 700, 705; affd., 49 Fed. (2d) 985. The theoretical computations of witnesses Coe and Coffman, based upon 1906 estimates of cost and selling price, and the theoretical computation of witness Richards, based upon revenue produced by these deposits, which were discounted by Hoskold’s formula, with varying results, do not, in our opinion, establish the fair market value of these properties as of the basic date. As the Circuit Court of Appeals for the Ninth Circuit said in Simons Brick Co. v. Commissioner, 45 Fed. (2d) 57, 58 (certiorari denied, 283 U. S. 834) :

* * * whatever the value of this [Hoskold’s] formula may be in cases where there is no other evidence of the value of deposits of minerals, etc., in place, and where the necessary factors are more clearly proved than in this ease, this is-not a case for its application. Here there is other evidence of a definite character as to the actual value of the clay lands on March 1, 1913 * * *.

Upon a consideration of all of the evidence, we are of the opinion that the respondent’s determination of the March 1, 1913, value of the petitioner’s limestone deposits and. his allowances for depletion should not be disturbed.

The next issue is the deductibility of certain amounts designated as “ contributions, subscriptions, or donations.” This opinion would be inordinately prolonged by a discussion of and decision on each of the enumerated items set forth in our findings of fact. Suffice it to say that such items are deductible or not, when considered in the light of the facts of each case, upon the application of the general principle that “the question always is whether, balancing the outlay against the benefits to be reasonably expected, the business interest of the taxpayer will be advanced.” See American Rolling Mill Co. v. Commissioner, 41 Fed. (2d) 314, 315, for a fuller discussion and citation of authorities. See also Yamhill Electric Co., 20 B. T. A. 1232.

Applying this principle to the items in controversy, we hold that items 2, 4, 5, 7, 10, 13, 16, 18, 23, 26, 28, 30, 31, 33, 36, 37, 38, 41, 47, 50, 54, 58, 68, 82, and 84 are deductible; and that items 1, 6, 8, 9, 12, 14, 15, 20, 21, 24, 27, 29, 32, 34, 35, 42, 43, 44, 46, 51, 52, 55, 59, 74, 80, and 83 are not deductible. No evidence was offered regarding items 3,11,17,19, 22, 25, 39, 40, 45, 48, 49, 53, 56, 57, 60 to 67, inclusive, 69 to 73, inclusive, 75 to 79, inclusive, 81, 85, 86, and 87, and the respondent’s disallowance of same is approved.

In view of the petitioner’s method of handling contributions of cement upon its books, no adjustment of the allowed items representing contributions of cement is necessary, since the credit of the full amount to sales is offset by the allowed deduction. However, the disallowed deductions representing contributions of cement require an adjustment by eliminating the profit upon this cement which has been credited to sales and erroneously included in gross income.

At the hearing, counsel for the respondent conceded error as alleged in the third issue and stipulated that petitioner’s gross income had been overstated by the amount of $3,769.57.

The remaining issue is whether the amount of the amortization of bond discount on the bonds of the petitioner’s affiliate, the California Central Bailroad Company, held by the petitioner during the taxable years under consideration is deductible in computing the consolidated net income of the affiliated corporations for these years. The facts of record do not distinguish the situation here presented from that ruled upon in New Orleans, Texas & Mexico Ry. Co., 6 B. T. A. 436, 441, wherein we held that such bond discount was not deductible. Following that decision, the respondent’s action in this particular is sustained. See also Gulf, Mobile & Northern R. R. Co., 22 B. T. A. 233, 261, wherein we followed our earlier decision on this point.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Goodkich dissents.

Murdock,

dissenting: I believe that a correct result has been reached in the prevailing opinion on the first and last points, but I do not agree that the other issue has been decided properly. The findings of fact indicate that there is insufficient evidence as to many of the items in controversy to determine whether or not they are deductible. Where the petitioner gave away cement of its own manufacture, it did not make sales, and it should not have included the market price of this cement in its gross sales for income-tax purposes. It is a misconception to say that some of these items are “deductible.” It is only necessary to eliminate the items from gross sales to settle the present controversy as to these items.

Marquette agrees with this dissent.


text:
    Wishon-Watson Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 38727.
    Promulgated January 22, 1932.

      A. Gadder Maohay, Esq., for the petitioner.

      Philip M. Olarh, Esq., for the respondent.
   OPINION.

Trammell:

The only matter now in controversy is whether the respondent erred in disallowing the deduction taken by the petitioner as a loss sustained on the transaction in December, 1925, whereby it transferred to two of its directors certain of its assets under the circumstances set out in our findings of fact. The petitioner contends that, haying sold in 1925 for $6,000 assets which had cost it $59,959.28, it sustained a loss of $53,959.28, which it is entitled to deduct. The respondent contends that the deduction is not allowable and urges that the transaction was a mere “ book write-off of assets,” since the notes given therefor were never paid but were charged off by the petitioner and deducted as bad debts in its income-tax return for the following year.

In support of his contention the respondent points out that the petitioner was practically a one-family corporation; that A. Emory Wishon and E. W. Watson, to whom the assets were transferred, constituted a majority of the petitioner’s directors, and that they could have established an apparent loss to the petitioner in any amount they chose by accepting as payment for the assets an amount necessary to produce the desired loss. He urges that the transaction in 1925 alone and apart from what later occurred was not the result of dealings at arm’s length between the parties and was not such a transaction as would permit the petitioner to take a deductible loss in that year.

In M. I. Stewart & Co., 2 B. T. A. 737, we said:

This transaction was a patent evasion. It can not be too much emphasized that alleged sales of property for the purpose of establishing losses must be real, valid transactions, definitely placing the legal and equitable ownership of the property alleged to have been sold out of the hands and out of the control of the seller. In the case of corporations sales to stockholders in all cases are subject to special scrutiny and their good faith must be unquestioned. The principle of corporate entity can not be used to cloak a transaction which is essentially a fraud upon the public revenue.

There can be no question in this case but that the assets were actually and validly transferred by the corporation to two of its directors, but the actual transfer of assets is not sufficient to authorize a taxpayer to take a deduction with respect thereto. In order to take a deduction before assets have become worthless, and it is not claimed in this case that they were worthless in the taxable year, it must be shown that there was a sale or other disposition thereof. It is contended in this case that there was a sale for a valuable consideration. The burden of proof is upon the petitioner to show this. Even considering for the sake of argument that a corporation may sell its assets to its directors at a price much less than the market value and much less than what it could get from others for the same assets at the same time and realize a deductible loss on account thereof, we are faced with the question here as to whether the parties to the transaction contemplated the payment of a valuable consideration for the assets transferred or whether a valuable consideration was paid which would warrant us in holding that there was in fact and substance a real sale of the assets, or if the transaction amounted to a mere gift or transfer without consideration to its directors and stockholders.

It is to be noted that the notes aggregating $6,000 given by those who received the assets were not to be paid, but were to be canceled and surrendered in the event there was an assessment of any size or character against the stock of the La Hacienda Company. Assessments had been made in the past against this stock and it might well have been assumed by all parties that such an assessment would be made in some amount after the transfer of the assets. The corporation owned 439.30 shares of the capital stock of that company of the par value of $100 per share. If the assessment had been $1 per share, it would have amounted to $439.30, and yet on account of that assessment the total of the $6,000 notes would be canceled, or, according to the terms of the agreement, even if a 10 cent assessment had been levied, amounting to $43.93 total, the entire amount of $6,000 represented by notes would not have to be paid. Just why the agreement provided that, if the assessment should be made upon the stock of the La Hacienda Company, the notes would not be payable, does not appear of record. The corporation owned a half interest in the lands known as the Black Mountain Oil Land, consisting of 40 acres, and owned other property which was included in the transfer. The record does not disclose the assets and liabilities of the Swan Oil Company and the Andy Fitz Mining & Milling Company. The only evidence as to the actual value of the assets transferred is the testimony of one of the individuals who received the assets to the effect that the directors did not consider them to be worth more than $6,000. Even if they were not worth any more than $6,000, we do not know how much of that value or what part of it was attributable to other assets than the La Hacienda Company stock. There is nothing to indicate that all of the assets would have been worthless if some assessment, however small, were made against that particular stock.

When we consider the relationship of the parties, the fact that they were all members of the Wishon family, except Watson, who was a son-in-law, and that all of them together owned all the stock of the petitioner, it may well be, so far as the record discloses, that the corporation intended to transfer the assets without any expectation of any consideration in money or money’s worth being paid. Considering that the two notes for $3,000 were surrounded with the conditions of cancellation, and the past record of the La Hacienda Company, and the reasonable probability that an assessment would be made against that stock in some amount, it might fairly be gathered from all the circumstances that the parties did not intend to pay any money whatever for the assets received from the petitioner and that the petitioner did not intend or expect to receive any. The notes were not negotiable with these uncertainties and conditions attached to them. They simply amounted to a promise to pay if and in the event that certain circumstances would not occur when it might reasonably have been anticipated at the time that they would occur.

Under the circumstances of this case we do not think that the petitioner has shown that an actual bona fide sale of its assets was made. The element of valuable consideration, which distinguishes a sale from a gift or other transfer without consideration, is not sufficiently shown. Accordingly, in our opinion the petitioner is not entitled to the deduction claimed as a loss resulting from a sale of assets in the taxable year.

Judgment will be entered under Bule 50,