author: Sternhagen : Lansdon,

text:
    George D. Widener, Petitioner, v. Commissioner of Internal Revenue, Respondent. Joseph E. Widener, Petitioner, v. Commissioner of Internal Revenue, Respondent. Eleanor W. Dixon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7723-7727.
    Promulgated October 8, 1927.
    1. Tbe conduct of racing and breeding stables in tbe circumstances held, a business and tbe expenses and losses are deductible.
    2. Losses and depreciation of trust estate are not pro rata deductions of tbe distributees of trust income.
    3. In determining tbe taxable net income of beneficiaries under a testamentary trust, tbe fact that the right, at tbe time of death, to receive such periodic distributions of income, bad a value does not serve to reduce tbe taxable net income embodied in such distributions. Such distributions are income both under tbe statute and under tbe Constitution.
    4. Such distributions when received are not to any extent themselves the bequest so as to be exempt under section 213 (b) (3), Revenue Acts of 1918 and 1921. Irwin v. GaviP, 2C8 U. S. 161.
    5. Death duties, whether upon tbe legacy or tbe estate, and income taxes are wholly different in concept and theory, and tbe fact that they may impinge upon each other in ultimate incidence by striking at the beneficiary so as to diminish first his inheritance and then his income therefrom, is a legislative matter which Congress has presumably considered.

      Schofield Andrews, Esq., J. 0. Peacock, Esq., W. B. Spofford, Esq., and Johm, W. Townsend, Esq., for the petitioners.

      J ohm, D. Foley, Esq., for the respondent.
    These proceedings involve deficiencies as follows:
    George D. Widener, 1919_$237,264.93
    Joseph E. Widener, 1919- 264,067. 06
    1920i- 69,783.52
    1921_ 75,387.10
    1922_ 29,923. 56
    Eleanor AV. Dixon, 1919_ 188,184.19
    1921_ 26,622.70
    1922_ 17,144.68
    The petitioners assign as errors by the respondent in determining these deficiencies, the following:
    1. Failure to alloiv the deduction, under section 214 (a) (1) of the Revenue Acts of 1918 and 1921, as ordinary and necessary expenses of a trade or business, of expenses incurred in connection with the operation of breeding and racing stables.

      2. Failure to allow tlie deduction, under section 214 (a) (4) of the Revenue Acts of 1918 and 1921, as losses incurred in a trade or business, of losses sustained on the sale and death of horses in connection with the operation of the stables.
    3. Failure to allow the deduction, under section 214 (a) (5) of the Revenue Acts of 1918 and 1921, as losses incurred in transactions entered into for profit, of losses sustained on the sale or death of horses alleged to have been purchased for profit.
    4. Failure to exclude from distributions of income received by each of the petitioners from funds held in trust, his proportionate share of the losses and depreciation sustained by the trust estate.
    5. Failure to exclude from petitioners’ income, in accordance with section 213 (b) (3) of the Revenue Acts of 1918 and 1921, any or all of the distributions received by them of income from funds held in trust, pursuant to the terms of certain wills.
    The parties stipulated some of the facts, and the rest are found from the evidence.
    FINDINGS OF FACT.
    The petitioners, Joseph E. Widener and Eleanor W. Dixon, are residents of Elkins Park, Montgomery County, Pa. The petitioner, George D. Widener, is a resident of Chestnut Hill, Philadelphia County, Pa.
    During the years from 1919 to 1922, inclusive, Joseph E. Widener owned and operated horse-racing and breeding stables. He started his stables about 20 years ago, and was moved to organize them by his great interest in horses. His breeding stables were located in Kentucky and his horses in training were quartered at Belmont Park and at Elkins Park. He took an active part in the management and operation of his stables and devoted a large portion of his time thereto. He employed all riders, looked after the engagement of all horses, personally directed the breeding of the horses, kept records of the breeding, determined what horses should be purchased and sold, and otherwise engaged himself in a general supervision of the stables. Nearly every time his horses were running in races he attended the tracks where they were running. He did not bet on the races.
    The employees of the stables included trainers, jockeys, blacksmiths, rubbers, exercise boys, and veterinarians. The expenses of operation included the salary and wages of such employees, feed, transportation, heat, stabling, stud fees, entrance fees, and insurance. The sources of income of the stables were purses, stakes, and the sale of horses.

      The gross receipts of the stables, the ordinary and necessary expenses of operating the same, and the amounts by which the expenses
    exceeded the receipts, for the years involved, are:

    He had purchased horses for his stables since March 1,1913, which died or were sold at prices less than cost, as follows:
    1919_§40,650
    1920_ 18, 950
    1921_ 33,400
    These amounts were made up as follows:

    In the majority of cases the horses sold were those which had proved not to be revenue earners.
    He attempted to make his stables a successful venture financially during the entire period of their operation, but with the exception of a few years at the start, they have been operated at a loss.
    He was dissatisfied with the results of the operations for the years from 1919 to 1922, and reorganized his entire racing interests. He discharged his trainer, and invested more money in the enterprise ■with the hope of making it a financial success. He imported a stallion from England for breeding purposes, which has returned stud fees of $110,000 in three years. As a result, 1925 and 1926 have been his best years.
    This petitioner is a director in a number of corporations, and has large financial interests therein.
    During 1919 George D. Widener owned and operated racing and breeding stables. He started his stables in 1916, and was moved to organize them by his fondness for horses and his interest in outdoor life. TIis breeding stables were located at Chestnut Hill, outside Philadelphia, and his horses in training were quartered at Belmont Park. He took an active personal part in the management of his stables. He made the entries, employed the trainer and jockey, supervised the breeding, and was generally concerned with the management of his stables. He attended the tracks where his horses were running whenever he was able to do so. He devoted more time to his stables than to his other interests.
    The character of the expenses of operation and the sources of income are the same as set forth above in the case of Joseph E. Widener.
    The gross receipts of this petitioner’s stables for 1919 were $38,886.75, the ordinary and necessary expenses of operation were $118,346.12, an excess of expenses over receipts of $79,509.37.
    He had purchased horses for his stables which were sold during 1919 for $11,455 less than cost, as follows:

    These horses were purchased for racing purposes.
    He began his stables with the idea that he would come out even financially, or make a profit. He was fond of horses and wanted an outdoor occupation. Each year the stables have been in operation the petitioner has sustained a loss thereon ranging from $30,000 to over $79,000. He is a director of a number of corporations.
    The respondent disallowed as deductions from the income of both these petitioners the ordinary and necessary expenses of operating the stables and the losses on the sale and death of horses.

      All the petitioners are beneficiaries for life under a trust created by the will of P. A. B. Widener, who died November 6, 1915.
    In article fourth of the said will he directed that his mansion house should be a part of his residuary estate and should be maintained out of the income of such residuary estate as the home of his oldest living male descendant. In article fifth of his will he gave the balance of the income from his residuary estate to his descendants upon the principle of representation. Article fifth provides, inter alia:

    Fifth : I give, devise and bequeath all the rest, residue and remainder of my estate, real and personal, subject to the exercise of the discretion which I have vested in my son, Joseifh, in the third paragraph hereof, unto my Executors hereinafter named and their successors in the Trust, and the survivors and survivor of them, In Trust, nevertheless, for the uses, persons and purposes and with the powers following:
    In Trust, until twenty-one years after the decease of the last survivor of those of my descendants who are alive at the time of my death, as follows:—
    To divide the net income monthly, into as many parts or shares as, at each time of monthly distribution, there shall be sons of mine then living and sons of mine then dead, represented by descendants then living, and to sub-divide the share falling to each set of descendants of a son of mine at any of said times dead, amongst them per stirpes, upon the principle of representation, and to pay over at each of said times to each of my descendants who may then be found entitled, his or her share, subject, however, to the power of appointment by Will over the income which would otherwise be payable directly to a descendant, which power I now vest in my son, Joseph, and in my grandson, George D. Widener, Jr., and in my granddaughter, Eleanore Elkins Widener Dixon, with respect to the descendants of each, namely:—
    The discretion referred to as being given to his son, Joseph, relates to a collection of art and is not material to this issue. Article seventh of the said will provides:
    Seventh : Wherever herein I have provided for the payment of income from my residuary estate to any Beneficiary, I direct that the same shall not be subject to attachment, execution, sequestration, or to any order of the Court, and that the Beneficiary shall have no power to alienate or anticipate said payments or encumber the same, nor shall said income be liable for the contracts, debts or engagements of any Beneficiary, but the same shall be paid by my Trustees to the legatee or devisee free and clear of all assignments, attachments, anticipations, levies, executions, decrees and sequestrations, and shall only become the property of the Beneficiary when actually received by him or her as the case may be.
    The said P. A. B. Widener was survived by one son, Joseph E. Widener, one of the petitioners in this proceeding, and by two children of a deceased son, namely George D. Widener and Eleanor W. Dixon, the other two petitioners in this proceeding.
    The balance of the net income of the residuary estate has been distributed since the creation of the trust and is distributed today in the proportion of one-half to Joseph E. Widener and one-fourth each to George D. Widener and Eleanor W. Dixon. The respondent has determined that the taxable income received by these petitioners from the said estate was as follows:

    The trustees of the estate of P. A. B. Widener sold securities and real estate belonging to the corpus of the estate during 1919 and 1920 at prices which the respondent has determined to result in losses to the estate of $481,333.84 and $103,257.70, respectively. During the same two years the trustees owned an office building, the Widener Building, and a hotel, the Ritz-Carlton, both located in Philadelphia. They leased both properties and returned the rents received as income. In 1919 and 1920 they charged off depreciation on the two buildings amounting to $183,681.51 and $184,023.70, respectively. The respondent has determined these charges to be reasonable depreciation charges and has allowed them as deductions from the income of the estate as an entity. The respondent disallowed these amounts as deductions in determining the petitioners’ distributive shares of the income of the estate.
    George D. Widener and Eleanor W. Dixon are also beneficiaries for life under a trust created by the will of their father, George D. Widener, Sr., who died April 15, 1912.
    By this will he left one-third of his estate to his widow outright, and gave the income from the other two-thirds to his two children and their issue upon the principle of representation, the trust to continue until the death of the survivor of the two children. Article fourth .of this will provides, inter alia:

    Fourth: I give, devise and bequeath all the rest, residue and remainder of lay estate, real and personal, wheresoever situate and howsoever found, and in case of the decease of my wife before me, the whole of said estate to my ) ixecutors hereinafter named, their heirs, executors, administrators, successors and assigns, in trust nevertheless, for the uses, persons and purposes and with the powers following:
    In Trust until the decease of my last surviving child, to divide the net income quarterly into as many parts or shares as at each time of quarterly distribution, there shall be children of mine then living, and children of mine hen dead represented by descendants then living or by appointees hereunder md to subdivide the share falling to each set of descendants or representatives sf a deceased child at any of said times of quarterly distribution amongst the descendants per stirpes, upon the principle of representation, and to pay over to such child and descendant who at each of said times of quarterly distribution shall be found entitled, its share free and clear of itg debts, contracts, engagements, alienations, and anticipations, and free and dear of all levies, attachments, sequestrations and executions.
    George D. Widener and Eleanor W. Dixon survived their father. Neither of them has exercised the right to withdraw one-fifth of the principal of the trust. The income of the trust has been distributed since its creation and is distributed today between them equally. The respondent has determined that the taxable income received by each from the said estate was as follows:

    The trusts created by the wills of P. A. B. Widener and George D. Widener, Sr., both became effective January 1, 1916. As of that date Joseph E. Widener was 42 years of age, George D. Widener was 27 years of age, and Eleanor W. Dixon was 25 years of age. Under the American Experience Table of Mortality their respective expectancies of life were 26.7 years, 37.4 years, and 38.8 years.
    The present values as of January 1, 1916, of the petitioners’ rights to receive, or life estates in, the income from the trust established by P. A. B. Widener are as follows:
    Joseph E. Widener_•-$14, 846, 798.88
    George D. Widener_ 8, 892,461.37
    Eleanor W. Dixon_r_ 9,038,696.24
    The present values as of January 1, 1916, of the petitioners’ rights to receive, or life estates in, the income from the trust established by George D. Widener, Sr., are as follows:
    George D. Widener_$1,920, 349.33
    Eleanor W. Dixon_ 2,010,080.14
    The amounts received by each of these petitioners in distribution from these estates from January 1, 1916, to December 31, 1922, have not exceeded the January 1, 1916, value of their respective interests as set forth above.
   OPINION.

Sternhagen :

The first question to be answered is whether the activities of the petitioners in respect of their racing and breeding stables constituted a business. An affirmative answer carries with it the right to deduct the expenses of their operation and the losses sustained.

The’ evidence establishes that the petitioners were engaged in the business of breeding, buying and selling race horses and entering them in racing contests for gain. They testified that they sought at all times to make a success of the enterprises and that their only measure of success was financial gain. Their horses were purchased as investments, the selective breeding was influenced by the thought of winning stakes and purses, and the disposition of horses was either for profit by sale or for riddance of those not economically useful. These are among the characteristics of business. Wilson v. Eisner, 282 Fed. 38; 2 Am. Fed. Tax Rep. 1744. The fact that petitioners were wealthy enough to afford a hazardous occupation in which they found pleasure despite discouraging losses does not establish the essential nature of the occupation. If they were utterly indifferent to whether there was loss or gain or if it were shown that the stables were an incident to the social or domestic aspects of their daily lives, the result might be against them, as in Thacher v. Lowe, 288 Fed. 994; 2 Am. Fed. Tax Rep. 1931. Instead, it appears that they devoted themselves seriously and assiduously to the economic promotion of their stables always in the hope that profit would result. The winning of a single race or the chance purchase of a yearling might at any time convert steady losses into a net profit, and make it a successful business. The expenses and losses are deductible and the determination of respondent in respect of the first two assignments of error is reversed. This likewise disposes of the third assignment, which is an alternative only and therefore need not be considered.

The second issue presented is whether the petitioners, being beneficiaries of the trusts established by the wills of P. A. B. Widener and George D. Widener, Sr., are each entitled, in the computation of their individual net income, to deduct an aliquot part of the losses and depreciation of the trust estate although the petitioners received from the trust the distribution of income without such deductions. This question has been ruled adversely to petitioners in Baltzell v. Mitchell, 3 Fed. (2d) 428; 5 Am. Fed. Tax. Rep. 5230, certiorari denied, 268 U. S. 690; Louise P. V. Whitcomb, 4 B. T. A. 80; Elizabeth M. Abell, 4 B. T. A. 87; Mary P. Eno Steffanson, 1 B. T. A. 979; George M. Studebaker, 2 B. T. A. 1020; Helene R. McConnell, 3 B. T. A. 260; Marguerite T. Whitcomb, 5 B. T. A. 191 (now on review in Court of Appeals, District of Columbia); Sophia G. Coxe, 5 B. T. A. 261; O. Ben Haley, 6 B. T. A. 782; Arthur H. Fleming v. Commissioner, 6 B. T. A. 900; and, as stated in Arthur H. Fleming, supra, the decision in Julia N. DeForest, 4 B. T. A. 1059, is, by reason of its different facts, not a contrary authority. The respondent has allowed the trustee of each estate to deduct the losses and depreciation in computing the net income of the estate, and this is in accordance with the foregoing decisions. The beneficiaries are not entitled to the deductions, and the respondent is on the fourth assignment sustained.

. The last error assigned is that the respondent taxed the petitioners in respect of the entire distributions received by them annually from the income of the two trusts of which they are beneficiaries. Petitioners contend that the value of the expectancy or life interest, the right to receive annual income, was capital to each of them acquired by bequest, and that they are entitled to set aside untaxed the annual distributions until they aggregate this so-called capital sum before taxing any part thereof as income. They say that the expectancy was property clearly capable of valuation, the value of which was substantially agreed upon, and that since this property was expressly bequeathed it is exempt from income tax by sections 213 (b) (3) of the Revenue Acts of 1918 and 1921 here involved; and furthermore, that otherwise the Constitution would be violated.

The distributions in question are, by the terms of the trusts, made only from the income of the trust, and do not invade the corpus. They are not fixed annuities, such as were involved in Ronald DeReuter, 7 B. T. A. 600, to be paid in any event whether from corpus or income. If there be no income of the trust there will be no annual distribution. Nor were they acquired by investment, as the court held in respect of the periodic payments in Warner v. Walsh, 15 Fed. (2d) 368; 6 Am. Fed. Tax Rep. 6340.

The present situation is squarely within Irwin v. Gavit, 268 U. S. 161; 5 Am. Fed. Tax Rep. 5380, and, as in that case, it is not to be supposed that Congress in section 213 (b) (3) intended to restrict the scope of the broad intendment of section 213 (a). While it may be, so far as the court’s opinion discloses, that no attempt was made by Gavit to establish a value of the expectancy at death, claiming rather that all distributions were in themselves the bequest, nevertheless the reasoning of the opinion gives no warrant for the belief that the decision would have been at all different if such valuation had been fixed in the record. The taxpayer argued that the periodic receipts by him were but the realization of his bequest and hence exempt, and the court held that they were entirely income. The court recognized that the expectancy constituted an interest in the fund itself, and since it had long been recognized (under the 1898 legacy tax act, United States v. Fidelity Trust Co., 222 U. S. 158; Simpson v. United States, 252 U. S. 547; 4 Am. Fed. Tax Rep. 4735) that such interest was property of value subject to death duty (a doctrine prevailing in several of the States) we are compelled to believe that the decision in the Gavit case was reached in the full light of that established law.

These two taxes — the death duty, whether upon the legacy or upon the estate, and the income tax — are wholly different in concept and theory, and the fact that they may impinge upon each other in ultimate incidence by striking at the beneficiary so as to diminish first his inheritance and then his income therefrom, is a legislative matter which Congress has presumably considered. Our present concern is to consider whether the distributions of what is indisputably income of the trust are income to petitioners, and if so, whether as such the statute taxes them or exempts them.

The petitioners argue that, irrespective of the statutory exemption of bequests, the full amount of distributions'is not income because out of such distributions they are entitled to recover, as capital, the value of the right to receive them. This is the theory — that because the right had a value which would serve to measure a legacy tax it was capital of petitioners thenceforth, that it is thereafter being diminished, that the diminution is in some way brought about by the distributions of income, that such distributions are the only means to offset the diminution, and hence to the extent of such offset the distributions are a “return of capital.” We may pass the question whether in the true sense this “ right to receive income ” is capital— whether the capital, if any, is not represented only by the interest in the fund which produces the income — whether it is not subversive of the entire concept of income to say in turn that a gratuitous right to receive it is capital and hence the realization upon that right is recovery of capital. There is a point of revolt against the tyranny of logic. But suppose it is capital, wherein is it impaired or diminished? It persists in full force. It begins at death as a right to receive income from, and thus an interest in, the fund, and continues throughout in as great a measure as it began. To be sure, the lapse of time affects the probable number of future payments, but how can this change the nature of the payments as income when received? Suppose they were to go on forever, would they be more capital because of longer expectancy, or less capital because beyond the formula of valuation? Nothing invades the interest in the fund and no receipt of the distributable income reduces it — a complete distinction from the situation in Doyle v. Mitchell Bros. Co., 241 U. S. 179; 3 Am. Fed. Tax Rep. 2979, cited by petitioners. Why then should any part of the distributable income be left untaxed, since it takes nothing from the right to receive it? Income it is called in the trust instrument and income it is, and hence within the language and intendment of section 213 (a). This is substantially in accordance with Ernest P. Waud et al., Executors, 6 B. T. A. 871, and with the obiter of Ernest M. Bull, Executor, 7 B. T. A. 993, which in effect . say that income is no less income because it is received pursuant to a preexisting valuable right.

The second question then arises, whether this income is a bequest and hence within the exemption of section 213 (b)(3). This, as already stated, is in our opinion answered in Irwin v. Gavit, supra, to the effect that the income itself is not the bequest, which in our opinion carries with it the decision that the income is not to be limited by reason of a valuation given to the right to receive it. It is, as petitioner contends, established that a testamentary right to the income from a fund is subject to legacy tax and for that purpose is capable of valuation. But this does not bring it within the in-tendment of the exemption of section 213 (b)(3). The Supreme Court in the Gavit case said that that exemption provision “ assumes the gift of a corpus and contrasts it with the income arising from it, but was not intended to exempt income properly so-called simply because of a severance between it and the principal fund. No such conclusion can be drawn from Eisner v. Macomber, 252 U. S. 189; 3 Am. Fed. Tax Rep. 3020. The money was income in the hands of the trustees and we know of nothing in the law that prevented its being paid and received as income by the donee.”

Furthermore, while the section exempts the value of bequests it carefully provides that the income from the bequest is not exempt. Here, as we have seen, the distributions are the income from the petitioners’ interest in the fund and are, as such, expressly removed from the exemption.

What has been said is sufficient to demonstrate that the distributions are income under the Constitution as well as under the statute, and that Congress was therefore authorized by the Sixteenth Amendment to tax it as it did. In essence there is a similarity in the argument to that of Bowers v. Taft, 20 Fed. (2d) 561, in that the value of the gift at the time of transfer is said to be capital and as such necessarily to be recovered before finding income. But the Circuit Court of Appeals held that the gain was properly subject to tax to the donee as it would have been to the donor. And in the Gavit case Mr. Justice Holmes seemed to have the same concept when he said that income in the hands of the trustee was taxable when received by the donee.

Petitioners cite Warner v. Walsh, supra. That case is distinguishable for at least one reason, that the court expressly laid it on the ground of a purchased annuity, the consideration for which was the widow’s relinquishment of her fixed and valuable rights. The value of the consideration was a capital investment, which is not the situation here.

, It is our opinion that the full amounts of the distributions are taxable income to petitioners, and the respondent is sustained as to the fifth assignment.

Reviewed by the Board.

Judgment will be entered on 15 days’ notice, under Bule 50.

ARTxndell did not participate.

Smith, Trammell, Trtjssell, Love, and Yah Fossan dissent on the first point.

Lansdon,

dissenting: I disagree with the action of the Board in holding that the losses sustained by the petitioners, Joseph E. Widener and George D. Widener, in maintaining and operating racing stables, are deductible from the respective gross income of the petitioners in each of the several taxable years.

Horse racing has long been called the “ sport of kings.” There is a well defined difference between sport and business. The one is pursued for personal pleasure, relaxation or recreation; the other is engaged in for the purpose of earning profits or as a means of livelihood. It is one of the characteristics of sport that it wastes capital. On the other hand a primary attribute of business is the conservation and increase of capital. Sport employs wealth to secure pleasure; business utilizes it to create more wealth. The motives that impelled one of these petitioners to enter the horse-racing business are set forth in the findings of fact as that “ He was fond of horses and wanted an outdoor occupation.” This does not suggest an intention to engage in a business for profit.

In the cases of both the Wideners there is in the record a very definite statement of receipts, expenses and losses for each of the taxable years, but there is no information as to the amount of capital employed. It is hardly possible to determine whether an enterprise is conducted as a business if the amount of the investment is not known. It is obvious from the figures here that unless the stables of the petitioners were heavily financed at the outset, the original capital was lost several times over prior to and during the taxable years. The huge annual deficit disclosed by the record must have been made good by equally huge additional capital contributions. This is a process aptly described in the speech of the common man as “ throwing good money after bad ” and is rarely indulged in by real business men. Ordinarily it is impossible in an enterprise carried on for profit or as a means of livelihood, but it is not at all an unusual procedure for those who, regardless of expense, pursue some sport, recreation or pastime for personal gratification. The excess-profits-tax law recognized the principle that capital employed in business for profit is entitled to a fair return before any income emerges. If these petitioners were in a position to claim an 8 per cent return on their capital investment and also to reduce their respective gross incomes by the amount of these alleged losses, it is plain that in time they might entirely avoid any payments to the public revenues, even though they were eventually in receipt of substantial annual receipts in excess of expenditures.

Certainly no one would contend that the fact that an enterprise sustains losses in a given year or even for a series of years is proof that it is not conducted for profit. Due to commercial conditions, crop failures, changes in an art, the vagaries of fashion or any one of numerous other causes, many men have found themselves forced to continue a losing business year after year in the hope of recouping their fortunes by some favorable turn of affairs. Such conditions do not exist here. These petitioners voluntarily engaged in an enterprise that is notoriously uncertain. They made good their losses and continued their operations after it was clear that there was little if any prospect of profit. The motives and purposes that governed them were not based either on the hope of or the desire for profits. They were willing to pay and able to pay for the pleasure which they derived from indulging in the “ sport of kings ” and doubtless the resulting personal gratification was ample compensation for the costs incurred.

The findings of fact, supra, indicate that racing rather than the breeding and sale of horses was the principal purpose for which these petitioners conducted their alleged business. It is recited that the employees of the stables included trainers, jockeys, blacksmiths, rubbers, exercise boys, and veterinarians. Services rendered by such men are peculiarly necessary in conducting a racing stable but they have a relatively small place in the organization and operation of a breeding farm. None of the so-called business activities of the petitioners during the taxable years appear to have resulted in profit or to have been conducted with any hope of profit. Had these enterprises been conducted for gain there should have been some sales of proved and winning horses at profitable prices. It appears however that only those animals that had been tested and found wantin^ in speed were sold. Apparently all the sales set forth in the record were made not for purposes of gain but to realize losses already manifest, in proved lack of racing qualities or to prevent further losses.

Only the taxable years 1919, 1920, 1921, and 1922 are involved in these appeals. It would seem therefore that the finding that after the results of the operations for 1919-1922, inclusive, were known, Joseph E. Widener reorganized his stables and made a greater effort to secure favorable results, is not pertinent here. The fact that some time after the last of the taxable years this petitioner imported a breeding sire from England and received large stud fees for the services of that animal has no relation to the issues now under consideration. For all that the record shows, this animal may not have been bought until some time in the year 1924. None of the amount of $110,000 earned as stud fees was received in either of the taxable years. Very rarely, if at all, should tax liability for a given year be determined by events occuring subsequent to such year.

The taxes here in controversy were imposed by act of Congress at a time when the republic was in desperate need of revenue. Every good citizen values the privilege of contributing to the public income in proportion to his ability to pay. Had Congress elected, as is within its power, to levy a tax on gross income, this and thousands of other tax disputes would have been avoided. For reasons that doubtless are sound and defensible, the law-making body chose to tax net income. This made it necessary to lay down rules governing credits, exemptions, and deductions.

In the statutes enacted for the guidance of all who have to do with the assessment and collection of Federal income taxes, there are provisions that each taxpayer is entitled to deduct from his gross income for any taxable year all the losses sustained and all the ordinary and necessary expenses paid or incurred in carrying on his trade or business in such year. The losses which these petitioners seek to deduct resulted from the payment of expenses incident to the conduct of racing stables. If such expenses are not in themselves deductible, neither are losses resulting therefrom. While the law nowhere says so in exact terms, it was obviously the intention of Congress to authorize the reduction of gross income by the cost of producing such income before the determination of tax liability. In this connection there is an express provision that personal expenses are not so deductible. This principle rests on the sound basis that business expenses represent the cost of producing income, while personal expenses relate only to the uses that are made of such income. The' deductions here claimed were not losses incurred in the production of any part of the income which the respondent proposes to tax, nor, in my judgment were they sustained in carrying on any trade or business for profit. They resulted from expenses purely personal to the petitioners.

I am convinced that Congress had incomes such as we have under consideration in mind when it provided that there should be no deduction from gross income on- account of personal expenses. To permit these petitioners and others of their type to reduce their tax liability by the deduction of the costs of maintaining racing stables, expensive estates, and other similar activities, would result in a shifting of the burden of public taxation which it seems to me would be wholly inconsistent with the public interest. I am satisfied that these petitioners have not sustained the burden of proof necessary for us to find that the alleged losses were sustained during the taxable years in a business conducted for profit. I feel that the allowance of the deductions claimed would be contrary to the intent of Congress, detrimental to the public interest and a dangerous perversion of the sound and equitable principles upon which just taxation must rest.

         Sec. 214. (a) That in computing not income there shall be allowed as deductions:
      (1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *

       (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
      (5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if Incurred in any transaction entered into for profit, though not connected with the trade or business; * * *.

       Sec. 213. That for the purposes of this title (except as otherwise provided in section 233) the term “gross income”—
      *******
      (b) Does not include the following items, which shall be exempt from taxation under this title:
      *******
      (3) The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income).

         Sec. 213. That for tile purposes of this title (except as otherwise provided in section 233) the term “gross income”. — •
      (a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *

       Died; no insurance.

       Died Nov. 7, 1920.

       Died.

         Critically injured.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    Shillito Realty Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. John Shillito Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6186, 6187.
    Promulgated October 8, 1927.
    1. Petitioners held to have been affiliated during the taxable years.
    2. Additions to a business building, made in the process of remodeling, held, to have a useful life equal to the remaining useful life of the building of which they constituted an inseparable part.

      U. A. Hihills, G. P. A., for the petitioners.

      J. Harry Byrne, f?sy., for the respondent.
    The respondent asserts deficiencies in income and profits taxes as to the Shillito Realty Co. for the fiscal years ended March 31, 1918, 1919, and 1920, in the respective amounts of $12.95, $3,744.94, and $3,198.65, and for the John Shillito Co. for the fiscal years 1919 and 1920, in the respective amounts of $24,126.42 and $26,633.42, and advised petitioners of an overassessment for' the fiscal year 1918 in the amount of $9.81. The issues for consideration and decision are (1) whether the petitioners were affiliated during all the taxable years involved; (2) determination of intangible values acquired by the John Shillito Co. in exchange for shares of its capital stock at date of its incorporation; (3) increase of taxable income of the John Shillito Co. on account of its payment of Federal taxes for the Shillito Realty Co. in certain years; (4) determination of depreciation deductions with respect to “ store fixtures ” and “ cost of remodeling store building,” properly allowable to the John Shillito Co. for each of the taxable years; and (5) determination of depreciation on store building owned during the taxable years by the Shillito Realty Co. It was agreed by the parties that the two proceedings should be consolidated for hearing and decision.
    FINDINGS OF FACT.
    The John Shillito Co., hereinafter sometimes designated as the Store Company, is an Ohio corporation that was organized in 1882, as the successor of a partnership that was established about 1830. Its principal office is at Cincinnati, where it conducts a retail department store. Prior to the year 1914 it owned in fee the property, in which its business was conducted at Race and Seventh Streets in Cincinnati, consisting of land and a six-story building wdth basement and subbasement, constructed of brick and wood, and classified by fire underwriters as a slow combustion structure.
    In the year -1914, for the purpose of converting a portion of its fixed assets into liquid working capital, the Store Company caused the Shillito Realty Co., hereinafter sometimes designated as the Realty Company, to be incorporated with authorized capital in the amount of $1,200,000, divided equally into preferred and common stock, all of which had full voting power. Upon the completion of such incorporation the Store Company deeded the Realty Company the land and buildings heretofore described and received in payment therefore $600,000 in cash, and all the common stock of the Realty Company of the par value of $600,000. The cash involved in this transaction was secured by the sale of the preferred stock of the Realty Company to stockholders of the Store Company and to the public.
    Following its acquisition of the real estate, as above set forth, the Realty Company made a perpetual lease of the property so acquired to the Store Company. The consideration for such lease was the payment of an annual rental in the amount of $60,000, and the payment by the lessee of all taxes, insurance, and assessments against the property and of all the other operating expenses of the lessor. The lease also provided that the lessee should have an option to repurchase the property after 10 years for the amount of $1,200,000. On June 25, 1918, the Eealty Company, pursuant to a formal request by the Store Company, reduced the annual rental for the store property to $36,000.
    The officers and directors of the petitioners during the taxable years were as follows:

    The stockholders and stockholdings of the petitioners as at February 1,1917, were as follows:

      The only business of the Realty Company was the ownership of the property used by the Store Company, the collection of the rental therefor, and the declaration and distribution of dividends resulting solely from the receipt of such rental. Its office was in the office of the Store Company, and, during the taxable years, its officers and directors were at all times the nominees of Stewart Shillito. At each of its stockholders’ meetings the stock of the minority interests was voted by proxies given to a proxy committee of which John Shillito was chairman.
    Good will, trade-marks, and trade-brands, acquired in exchange for shares of capital stock by the John Shillito Co. at the date of its incorporation, had a value of $125,000.
    In his audit of the income and profits-tax returns of the John Shillito Co. for the years 1919 and 1920, the Commissioner held that such company had deducted the tax paid on account of the Realty Company in the respective amounts of $4,320 and $1,020 from its gross income for each of such years. No such deductions were made.
    The store building owned by the Realty Company during the taxable years had a value of $350,000 at March 1, 1913, and, at that date, had 20 years of remaining useful life. This building was remodeled subsequent to the year 1914, but prior to the taxable year, at a cost to the John Shillito Co. in the amount of $206,516.21. The furniture and fixtures owned by the John Shillito Co. and used by it in its trade or business, were carried on the books at the following costs: January 31, 1918, cost to date $236,027.12, addition during the year ended January 31, 1919, $4,344.99; January 31, 1919, cost to date $240,372.11, addition during the fiscal year ended January 31, 1920, $22,735.86; total cost at January 31, 1920, $263,107.97.
   OPINION.

Lansdon:

The issues to be determined are fully set forth in our preliminary statement, and will be considered and decided in the order stated. The evidence is conclusive, that the Realty Company was the creature of the Store Company, which had caused it to be incorporated solely for the purpose of acting as its agent in converting fixed assets into liquid working capital for use in its business. During the taxable years the Store Company owned all the common stock of the Realty Company. Such stock had one-half the voting power. Considerable percentages of the preferred stock of the Realty Company were owned by the officers and directors of the Store Company, and much of the remainder by its employees, the relatives, and close personal friends of the principal stockholders. Only an inconsiderable amount was in the hands of persons who properly may be regarded as outside interests. The circumstances under which the stock of the petitioners was held are very similar to the facts in Appeals of Midland Refining Co., 2 B. T. A. 292 and 296.

The conditions in the instant proceeding are almost exactly on all fours with the facts in Appeal of Abattoir Realty Co., 3 B. T. A. 415, in which we said:

The facts set forth disclose a complete unity of the enterprise, which was inherent in the creation of the Realty Co. and has remained so since. The Cincinnati Co. lias assumed the material responsibilities of the Realty Co. and dominates it completely. It owns all the common stock and its stockholders own two-thirds of the preferred. The directors are such persons as the Cincinnati Co. selects. The right of preferred stockholders to elect a majority of the directors is controlled by the Cincinnati Co. and its stockholders. The remaining preferred stockholders, even were they hostile to the Cincinnati Co. and its interests and were to vote or act in unison, could not be effectively adverse to the Cincinnati Co. But, so far as this record shows, there is no diversity of interest. Taking all the circumstances together, we are of opinion that the two corporations were affiliated within the taxable years in question.

In the light of all the evidence, and upon authority of our opinions cited, supra, we must hold that the petitioners were affiliated during the taxable years.

The parties have agreed and stipulated that the amount of $125,000 shall be included in the invested capital of the John Shillito Co. for each of the fiscal years ended January 31,1919, and January 31, 1920, respectively, as representing the value of intangibles acquired from its predecessor in 1882. This amount, therefore, should be included in the statutory invested capital of such company for each of the taxable years, subject to the limitations of section 326(a) (4) of the Bevenue Act of 1918.

The parties stipulate that the Store Company took no deduction for taxes paid on account of the Bealty Company for the years 1919 and 1920, in the respective amounts of $4,320 and $1,020. The respondent, therefore, erred in adding such amounts to the income of the Store Company.

The John Shillito Co. owned depreciable store fixtures and furniture during the taxable years in the amounts set forth in our findings of fact. The petitioners admit that an annual depreciation rate of 5 per cent on the cost of this property is reasonable and we find, therefore, that deductions from income for the years involved should be computed at that rate on costs as set forth in our findings of fact.

The evidence discloses that the store building owned by the Bealty Company was constructed about 1818, and was continuously kept in good repair. We have found that the value of this building at March 1, 1913, was $350,000, and that between that date and the first of the taxable years, it was remodeled at a cost of $206,516.21. As the remodeled parts are inseparable from the original structure, we are of the opinion that such additions can have no longer useful life than the building of which they are a part. The evidence convinces us that the entire building, even after it was remodeled, was far from modern and that, as a whole, its useful life could not be more than 20 years from March 1, 1913. The petitioners are entitled to depreciate the 1913 value of this building and the cost of remodeling on the basis of a term of useful life ending not later than March 1, 1933.

Judgment will be entered on 10 days' notice, under Rule 50.


author: Littleton :

text:
    Alice M. Hastings, Petitioner, v. Commissioner of Internal Revenue, Respondent. O. B. Hastings, Petitioner, v. Commissioner of Internal Revenue, Respondent. Maud Hastings Hanson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Leila H. Reed, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 5106, 5107, 5109, 5110.
    Promulgated October 10, 1927.
    1. When a corporation liquidates and Its assets are taken over by its stockholders, who conduct the business as a partnership, the transaction is controlled by section 201(c) of the Revenue Act of 1918.
    2. The dissolution of a corporation, and the transferring of its assets to a partnership, composed of the stockholders, who have the same proportionate interest in the partnership as they had in the corporation, may result in gain to the stockholders notwithstanding the fact that they took nothing out of the business.
    3. Fair market value of certain assets at date of dissolution of a corporation determined.

      Bernard Greensfelder, Esq., for the petitioners.

      Thomas P. Dudley, Esq., for the respondent.
    These proceedings were consolidated for hearing and decision.
    In the case of Alice M. Hastings, the Commissioner determined a deficiency of $6,326.37 for 1920. In the case of O. B. Hastings, he determined a deficiency of $7,586.36 for 1920. In the case of Maud Hastings Hanson, he determined a deficiency of $6,351.88 for 1920. In the case of Leila II. Reed, he determined a deficiency of $6,513.88 for 1920.

      The petitioners claim the Commissioner erred in holding that they realized a gain upon the dissolution of a corporation, in which they owned all the stock, and the transfer of the entire assets of the corporation to a partnership, in which they owned the same proportionate interest as they had held in the corporation. Petitioners further claim that the Commissioner erred in his determination of the fair market value of the corporate assets on date of dissolution, March 81, 1920.
    FINDINGS OF FACT.
    Alice M. Hastings, O. B. Hastings, and Leila H. Beed are residents of Cairo, Ill. Maud Hastings Hanson is a resident of Kosi-clare, HI.
    Samuel Hastings, the father of the above-named petitioners, was engaged in the grain and elevator business in Cairo, Ill., from 1885 until his death in 1905.
    In 1906, his widow, Mrs. A. S. Hastings, and four children, petitioners herein, organized the Samuel Plastings Co., an Illinois corporation, to carry on the business formerly conducted by him. The widow and each of the children owned one-fifth of the capital stock of the corporation. On March 81, 1920, the Samuel Hastings Co., Inc., was dissolved and its entire assets taken over by a partnership, composed solely of its stockholders, heretofore named, each former stockholder acquiring the same proportionate interest in the partnership as had been held in the corporation, which was an undivided one-fifth interest. Mrs. A. S. Hastings died on October 10, 1920.
    The articles of copartnership, dated April 1, 1920, extended over a period of five years. O. B. Hastings was made sole manager of the partnership and given power to direct and control its policies. In addition to sharing in the profits, he was to receive such salary as manager as might be agreed upon by his copartners. None of the other partners was required to give any time or attention to the business. It was provided in articles of agreement that the death of any partner should not dissolve the partnership, but that the interest of such deceased partner should continue to be bound by the articles of partnership during the five-year period, unless the other partners should consent to a withdrawal of such interests.
    The corporation’s final statement as shown by its books on March 31, 1920, the date of the dissolution, was as follows:
    KES0ÜECES
    Capital assets:
    Office and fixtures-$5, 628. 00
    Elevator and equipment_ 182, 664. 49
    Hackler House and equipment. 2, 260. 00
    Warehouse No. 1_ 6,767. 90
    Warehouse No. 2_ 4,200. 00

      Capital assets — Continued.
    Warehouse No. 3- $2, 002. 65
    Warehouse No. 4- 1,149. 65
    Warehouse No. 5_:- 840. 08
    Warehouse No. 6- 895.80
    Warehouse No. 7_ 1,922.91
    Warehouse No. 8- 1,000. 00
    Crib and scales, Gale, Ill- 275.00
    Delivery equipment_ 450. 00
    Miscellaneous equipment- 1,174. 57
    - $161,221.05
    Less depreciation_ 21, 026. 73
    Present value of equipment_ 140,194.32
    Trading assets:
    Inventory of merchandise_ 125, 340. 60
    Inventory of bags- 6,738.00
    Inventory of sulphur_ 81. 75
    - 132,160. 35
    Current assets:
    Cash in drawer_ 112.20
    First Bank & Trust Co- 81,170.18
    War savings stamps- 750. 60
    Cairo Real Estate Improvement Co- 1, 000.00
    Accounts receivable_ 171, 084.16
    Less reserve for bad account- 3, 059.37
    - 168, 024.79
    Notes receivable_ 3, 394. 53
    Advances to shippers_ 59,191.50
    Overdrafts due from shippers- 2,469. 67
    Total assets_ 588,468.14
    LIABILITIES
    Accounts payable- $6, 093.83
    A. S. Hastings- 9, 058.67
    O. B. Hastings- 6, 898.06
    A. M. Hanson_ 6, 500.76
    L. M. Reed_ 5,041.20
    M. A. Hastings- 2, 081.79
    W. L. Duncan- 56, 585.45
    H. L. Mowery- 2, 384. 87
    J. W. Allen_ 1,193.68
    Freight unpaid- 1, 033.09
    gelling brokerage- 801.27
    Labor_ 149.75
    Taxes_T_ 2, 233.15
    Total liabilities- 100, 055. 57
    Firm’s present worth- 488,412. 57
    Capital and surplus- 200, 000. 00
    Reserve for income and excess-profits tax- 47, 805. 68
    - 247,805.68
    Undivided profits.
    240,606.89

      The items of property, the fair market value of which is here in controversy, which were carried into the opening balance sheet of the partnership at the same figure as shown in the final statement of the corporation, are as follows:
    Physical properties:
    Office and fixtures_._ $5,628.00
    Elevator equipment- 132, 664.49
    Hackler House and equipment- 2, 250. 00
    Warehouse No. 1_ 6,767. 90
    Warehouse No. 2--- 4,200. 00
    Warehouse No. 3_ 2, 002.65
    Warehouse No. 4_ 1,149. 65
    Warehouse No. 5_ 840. 08
    Warehouse No. 6_ 895.80
    Warehouse No. 7- 1,922. 91
    Warehouse No. 8_ 1, 000. 00
    Warehouse No. 9_ 275. 00
    Delivery equipment_ 450.00
    Miscellaneous equipment_ 1,174. 57
    $161,221. 05
    Inventory:
    Inventory of merchandise_ 125, 340. 60
    Inventory of bags_ 6,738.00 Inventory of sulphur_ 81.75
    132,160. 35
    Accounts receivable. 171,084.16
    The Commissioner used the above book values in determining the liquidating dividend to the petitioners. Petitioners claim that the physical properties above mentioned have a book value of $161,221.05, less a reserve for depreciation of $31,010.79, leaving a net book value of $130,210.26 and a fair market value on March 31,1920, of $100,000; that the inventory of a book value of $132,160.35 had a fair market value of $112,336.30; that the accounts receivable totaling $171,084.16 face value had a fair market value .on March 31, 1920, of $162,529.95, resulting in a difference between the values as used by the Commissioner and the values claimed by the petitioners of $58,588.52.
    The fair market value of the physical properties above mentioned on March 31, 1920, was $100,000.
    The fair market value of the inventory on the same date was $132,160.35.
    The fair market value on March 31, 1920, of the accounts receivable was $162,529.95, or 5 per cent less than face value as carried on the books.
   OPINION.

Littleton :

Petitioners claim, first, that there was no gain to them upon the dissolution of the corporation and the transfer of its assets to, and the assumption of its liabilities by, a partnership composed of the former corporate stockholders, and, secondly, that if the Board should determine that there was a gain, the fair market value of certain of the assets was less than the amount shown by the books and as used by the Commissioner.

As to the first issue, the Board adheres to its previous decisions that upon the dissolution and liquidation of a corporation and the transfer of the corporate assets to a partnership composed of the stockholders, such stockholders must be regarded as having received their share of the assets with whatever gain or loss their receipt entailed. Appeal of E. C. Huffman, 1 B. T. A. 52; Appeal of D. F. Buchmiller, 1 B. T. A. 380; Appeal of F. D. Keim, 4 B. T. A. 1240; Langstaff v. Lucas, 9 Fed. (2d) 691; aff'd. in 13 Fed. (2d) 1022.

The accounts of the corporation were carried to the partnership books without change and the Commissioner in determining the net income of the partnership for the remainder of the year, April 1 to December 31, 1920, used the same figures.

Several witnesses who were familiar with the business and conditions surrounding the same, testified in detail as to the fair market value of the physical properties in question and, from a consideration of all of the evidence, the Board is of the opinion that the fair market value of the physical properties mentioned on March 31, 1920, was $100,000, as claimed by the petitioners.

As regards the value of the grain and hay inventory, there is some testimony to the effect that the fair market value of this inventory on March 31, 1920, was 15 per cent less than the value as shown on the books, or $112,336.30. In the opinion of the Board, however, the Commissioner was not in error in holding that the fair market value of the inventory was $132,160.35. This value appears to be supported by the market prices of the commodities as they existed on March 31, 1920. The market prices for hay and grain were then on an advance and so continued for about three months thereafter. The book values of the inventory were considered the same as the then prevailing market prices and were so fixed by O. B. Hastings, one of the petitioners herein. The market prices for such commodities did not, according to his testimony, become any lower until some time in June, 1920. The claim for a reduction in the value of the inventory is predicated upon the fact that the germinating season includes March and April; that losses are likely to be sustained upon the corn shipments in this period and that the entire merchandise inventory should, therefore, be reduced 15 per cent. There is nothing to show that this fact was not considered in fixing the value of the merchandise inventory at the figure of $132,160.35. However, there is no evidence of the amount of the corn inventory upon which the reduction in value is claimed. Certainly, there was no justification for reducing the inventory of hay below the then established market price. From a consideration of all of the evidence on this point, there appears no good reason for allowing the reduction claimed in this instance, and the Commissioner’s determination of a value of $132,160.35 for the hay and grain inventory is approved.

The accounts receivable, amounting to $171,084.16, were carried on the books at face value. The evidence submitted by petitioners warrants the conclusion that the fair market value of the accounts receivable on March 31, 1920, was $162,529.95.

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

Considered by Smiti-i and Love.


text:
    Mary J. Carpenter, Administratrix, Estate of Maud E. Carpenter, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mary J. Carpenter, Petitioner, v. Commissioner of Internal Revenue, Respondent. D. M. Carpenter, Petitioner, v. Commissioner of Internal Revenue, Respondent. John F. Carpenter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 11070-11073.
    Promulgated October 10, 1927.

      Marion Butler, Esq., for the petitioners.

      P. J. Rose, Esq., for the respondent.
   Littleton :

The Commissioner determined and notified petitioners of deficiencies in income tax for the calendar year 1920 as follows:

Mary J. Carpenter, Administratix_ $160.99
Mary J. Carpenter- 160.99
D. M. Carpenter_ 5, 727.78
John F. Carpenter_ 139.73

The issue as presented by the pleadings and the evidence, which is the same in all of these proceedings, “ involves a question of fact, namely, the March 1, 1913, value of stock of the Maiden Cotton Mills ” of Maiden, N. C., 558 shares of which stock petitioners sold in 1920 for $300 a share.

findings of fact.

Petitioners are residents and citizens of Maiden, N. C. On March 1, 1913, and for many years prior thereto, they owned certain stock of the Maiden Cotton Mills, a North Carolina corporation, as follows:

Stares.
Maud E. Carpenter_ 50
Mary J. Carpenter_ 50
D. M. Carpenter_408
John E. Carpenter_ 50

This stock was acquired in 1894 in exchange for certain land and two operating cotton mills acquired and constructed by petitioners and other members of their family between 1880 and 1889.

The cost of the stock to petitioners, as determined by the Commissioner, is not in dispute, and during the year 1920 petitioners sold the stock owned by them in the Maiden Cotton Mills, as above set forth, for $300 a share.

The fair market value of this stock on March 1, 1913, was $275 a share. The Commissioner determined a value on March 1, 1913, for the stock in question, of $170.26 a share.

Judgment will be entered on 15 days’’ notice, under Bule 50.

Considered by Smith and Love.


author: Littleton:

text:
    Robert E. Dowling, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11449.
    Promulgated October 10, 1927.

      Ed/ioard F. Olcurh, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
   Littleton:

The Commissioner determined deficiencies in the amounts of $13,403.50 and $19,588.34 for the calendar years 1920 and 1921, respectively. The deficiency for 1920 is not in controversy and the amount thereof was paid prior to the hearing of this proceeding. The petitioner claims that $16,282.32 of the deficiency determined for the calendar year 1921 is erroneous for the reason that the Commissioner, in determining the loss sustained in that year, should have used the March 1, 1913, value for 600 shares of stock of the Guardian Trust Co. owned by petitioner of $125 a share instead of $80 a share.

FINDINGS OF FACT.

Petitioner is a resident and citizen of New York, N. Y. In 1910 he purchased 600 shares of the capital stock of the Guardian Trust Co. of New York for which he paid $175 a share cash and from that date he continued to be, and was on March 1, 1913, and in the year 1921, the owner of said 600 shares.

The Guardian Trust Co. was organized several years prior to 1910 under tbe laws of the State of New York and had capital stock of $500,000 divided into 5,000 shares of the par value of $100 each. This company had been for several years and was on March 1, 1918, a going concern engaged in the banking and trust company business and was subject to the strict supervision of the State Superintendent of Banks and the State Banking Department of the State of New York. The stock of the Guardian Trust Co. was closely held, practically all of it being owned by seven individuals who would not sell their stock. The stock of the Guardian Trust Co. was not listed on any exchange and there were very few sales of any shares of this stock within a year prior to March 5,1913, when the Guardian Trust Co. sold its assets to the Empire Trust Co. as hereinafter more particularly set forth.

The only dealings in the stock of the Guardian Trust Co. were what is known as over the counter ” and it was rarely dealt in in that manner. The stock was occasionally quoted in the Commercial and Financial Chronicle in 1912 and 1913, but such quotations usually showed either a bid and no ask price or an ask and no bid. Whenever a bid and an ask price were given on a particular date the difference between the two varied from 20 to 30 points. These quotations were not based upon and did not represent actual sales of the stock. There was on March 1,1913, no established market price for the stock.

The value of the assets of the Guardian Trust Co. on March 1, 1913, exceeded $3,300,000 and the liabilities to depositors were in such amount that there was left an excess of assets over liabilities for deposits and all other liabilities were over $960,000. Five hundred thousand dollars of the excess of the assets over liabilities represented capital and the remainder represented surplus and undivided profits.

On March 5, 1913, there was authorized by the stockholders, and thereupon completed, a transfer of the assets of the Guardian Trust Co. to the Empire Trust Co. of New York, under the terms of which sale or transfer the Empire Trust Co., as purchaser, assumed complete liability for the full amount of deposit liabilities of the Guardian Trust Co., and, in addition thereto, agreed to and did at once pay to each stockholder of the Guardian Trust Co. the amount of $50 a share upon the stock. The plan of sale to and purchase by the Empire Trust Co. provided that the stockholders of the Guardian Trust Co. should ultimately receive in addition to the $50 a share paid to them at the time of transfer, all further realization upon the assets after deducting the expenses of liquidation.

One of the stockholders of the Guardian Trust Co. owning 220 shares of its stock objected to the sale and transfer of the assets to the Empire Trust Co. but the sale and transfer was duly carried over his protest and the transfer became in all respects completed and fulfilled. Thereafter, pursuant to section 17 of the New York Stock Corporation Law, this stockholder instituted a proceeding in the Supreme Court of New York County by petition verified April 24, 1913, for the appraisal of the value of his 220 shares of stock as of March 5,1913, the date of the sale and transfer, which resulted in an order of the said court dated December 11, 1913, fixing the value of his stock on March 5, 1913, at $150 a share. Although no appraisers were actually appointed by the court and the said order was a consent order based upon a stipulation filed by the attorneys for the parties to the litigation, it was- entered into at a time when the interests of the stockholders of the Guardian Trust Co., as well as the stockholders of the Empire Trust Co., demanded that the lowest possible value be placed upon said stock, and at a time when no interest of the stockholders would be served by a compromise of the litigation, unless such compromise should result in a lower value being placed upon the stock than would likely be placed upon it by appraisers.

Between March 1, 1913, and 1921 business conditions materially changed and the full value of the assets of the Guardian Trust Co. on March 1, 1913, was not realized during the period of liquidation, March 5, 1913, to and including 1921. Although there was no loss upon liquidation to the stockholders, the stock of the Guardian Trust Co. became of no value in 1921 when liquidation was completed.

In his fncome-tax return for the year 1921, petitioner deducted as a loss the amount of $75 a share, being the difference between $50 received on March 5, 1913, and the March 1, 1913, value of $125 a share for the stock.

The Commissioner based his determination of the value of petitioner’s 600 shares of stock upon quotations appearing in the Commercial and Financial Chronicle on or about March 1, 1913, and advised petitioner that “ No change has been made in the computation of the loss on 600 shares of stock of the Guardian Trust Co. as shown by the Revenue Agent. The loss of $18,000 has been computed and allowed by the agent based on the March 1,1913, value of $80 a share, as shown by the Commercial and Financial Chronicle, which is considered by this office as the best evidence of the value of the stock at that date.”

The fair market value of the 600 shares of capital stock of the Guardian Trust Co. acquired by petitioner in 1910 was $125 a share on March 1,1913.

Judgment will he entered on 15 days’ notice, under Rule 50.

Considered by Smith and Love.


text:
    Max Kurtz, Petitioner, v. Commissioner of Internal Revenue, Respondent. Robert Kurtz, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 11411, 11412, 15959, 15960.
    Promulgated October 10, 1927.
    1. The evidence in these proceedings does not show that the Commissioner erred in his determination of the reasonable allowance for exhaustion, wear and tear of machinery and equipment, and automobiles, and in refusing to allow the cost of plumbing and heating fixtures in the taxable year 1923 as expense.
    2. A sale of 436,000 Italian lire in the year 1920 was 'bona fide and the loss of $34,870.80 sustained upon such sale was a proper deduction in that year.
    3. The evidence shows that $1,479.43 represented wages paid employees engaged in manufacturing operations, and the Commissioner erred in holding that this amount was paid to a superintendent of construction in the erection of a new building, and should be capitalized.
    4. The amount of $520 expended in 1920 for whitewashing a building was an ordinary and necessary business expense for that year.
    5. The partnership of which petitioners were members kept its books upon an accrual basis. In 1921 a considerable amount of its merchandise was destroyed by fire, which loss was fully covered by insurance. The insurance company admitted liability for whatever loss had been sustained, but disagreed with the partners as to the amount of the loss sustained. This was finally adjusted in 1922 and 1923 and the partnership was paid the total loss claimed.
    The Commissioner allowed the total loss sustained in 1921 and offset against it the insurance thereon, a portion of which was not, however, actually received by the partnership until 1922 and 1923.

      Held, that the Commissioner did not err in this regard.

      Briggs G. Simpieh, Esq., and Charles P. Swope, Esq., for the petitioners.

      Frank S. Easby-Smith, Esq., for the respondent.
    On December 2, 1925, the Commissioner mailed to petitioners notices in which he proposed to assess against them deficiencies as follows:

    Petitioners instituted proceedings, Docket Nos. 11411 and 11412, for the redetermination of these deficiencies.

      On March 16, 1926, the Commissioner mailed petitioners notices in which he proposed to assess against them deficiencies as follows:

    Petitioners instituted proceedings, Docket Nos. 15959 and 15960, for the redetermination of these deficiencies.
    Petitioners, who were, during the years involved, members of the partnership of Kurtz Brothers, were not accorded a hearing before the Commissioner in connection with the additional tax proposed to be assessed against them. In these proceedings they claim that the Commissioner erred (1) in failing to allow a deduction for 1920 of $1,479.43, representing wages paid employees; (2) in treating the cost of plumbing and heating fixtures as a part of the real estate account instead of as machinery and equipment for the purpose of determining the deduction for exhaustion, wear and tear; (3) failure to determine adequate depreciation on separate items of machinery and equipment for each of the years involved; (4) in allowing depreciation on automobiles for each of the years involved at the rate of 20 per cent instead of 25 per cent per annum; (5) in failing to allow as deductions from gross income for the year 1920 a loss of $34,870.80, alleged to have been sustained in that year from the sale of 436,000 Italian lire; (6) in including as income for the year 1921 certain fire insurance which was not received by the partnership until 1922 and 1923; (7) in refusing to allow as an ordinary and necessary business expense a deduction of $520, representing the amount expended in the year 1923 for whitewashing the walls of an old building, and (8) in failing to allow as a deduction from gross income for the year 1923, the cost of plumbing and electrical fixtures.
    FINDINGS OF FACT.
    Petitioners are brothers engaged in the sale of groceries at wholesale and in the manufacture of macaroni at Philadelphia, Pa. The business was established in 1892 and has since been conducted as a partnership in which each of the petitioners has owned a one-half interest. Originally the activities of the partnership were confined to the sale of groceries at wholesale and subsequently, during the year 1916, the manufacture and sale of macaroni on a small scale was commenced at a plant located on Seventh Street in the City of Philadelphia. During the year 1919, the partnership made extensive alterations and additions to its property located on Ninth Street, and since that year it has engaged in the manufacture and sale of macaroni on a large scale. Max Kurtz had exclusive supervision of the manufacture of macaroni.
    The parties are in accord as to the values or cost of the various properties upon which the annual deduction for exhaustion, wear and tear is in controversy. The Commissioner computed the allowance in each of the taxable years at the following rates:
    Per cent.
    Automobiles_ 20
    Horses and wagons- 20
    Machinery and equipment- 10
    Furniture and fixtures- 10
    Buildings_ 2
    Petitioners contend that the allowance for exhaustion, wear and tear for each of the taxable years should have been computed on the machinery and equipment values at rates ranging from 6% per cent to 33% per cent and on automobiles at 25 per cent, as follows:

    There was no overtime operation of the plant during the taxable years.
    During the years involved the partnership owned certain Ford, Dodge, and Studebaker passenger automobiles and certain automobile trucks. These cars were traded in after two or three years of use at substantial values.
    During the calendar year 1920, the partnership paid wages to certain of its employees engaged in the manufacture of macaroni in the amount of $1,479.43. This amount was disallowed as a deduction by the Commissioner upon the ground that it represented an amount paid to a superintendent in connection with the construction of an addition to the'plant of the partnership.
    During 1919 the partnership of Kurtz Brothers purchased as an investment 436,000 Italian lire, for which it paid $50,000. In November, 1920, the partnership sold these lire to Joseph Binenstock, a half brother of petitioners, at the then rate of exchange' for $15,129.20. At the time of the purchase of these lire, Binenstock, who was regularly engaged in business as a jobber of flour, was negotiating for the purchase of a large quantity of Italian olive oil and believed that he could make a substantial profit upon the lire. Shortly thereafter, Binenstock’s negotiations for the purchase of the olive oil failed and on December 30, 1920, he sold the 436,000 lire back to the partnership for $15,129.20, at the current rate of exchange, which was the same as at the time he made the purchase. The partnership claimed a loss of $34,870.80 on the sale of these lire to Binen-stock. The Commissioner disallowed the loss on the ground that the sale to Binenstock was not bona -fide.

    During the year 1921 a fire occurred in the plant of the partnership, resulting in the destruction of a considerable amount of merchandise. The loss was fully covered by insurance. Immediately after the fire, the insurance company admitted liability for the loss under the insurance policies, but at the end of the year 1921 a satisfactory adjustment of the amount of the loss had not been arrived at between the insurance company and the partnership. In 1922 or in 1923, the insurance company paid the partnership the full amount of the loss claimed by it. The partnership kept its books upon an accrual basis. The Commissioner applied the total amount of insurance against the loss of merchandise destroyed by fire in 1921. The petitioners claim that the partnership is entitled to a deduction of the total amount of the loss by fire in the year 1921 as finally determined by the Commissioner and that the insurance money received for the destruction of such merchandise was income in the years 1922 and 1923 when actually received.
    In the year 1923, the partnership constructed an addition to its plant and in that connection expended the sum of $886.25 for plumbing and $2,007.74 for heating equipment in both the new and old buildings, and the partnership charged these amounts to expense and the Commissioner restored them to capital account. Also in 1923, after the completion of the new addition, the partnership expended the sum of $520 for whitewashing the old portion of the building to make it conform in appearance with the new. This amount was deducted as an expense and the Commissioner capitalized the same.
   OPINION.

Littleton:

Petitioners contend that the allowance for exhaustion, wear and tear, as determined by the Commissioner by the use of a composite annual rate of 10 per cent, is inadequate, and that the allowance should be computed on each item making up the machinery and equipment account at the rates hereinbefore set forth.

From a consideration of all the evidence we believe the allowance made by the Commissioner for exhaustion, wear and tear of plant and equipment at a composite rate of 10 per cent is reasonable. Max Kurtz, who was the only witness testifying in this regard, undertook to give his opinion as to the probable life and the rate of depreciation of the various items of the plant and equipment, but his testimony was equivocal and is not convincing. A consideration of Ms testimony convinces us that, in making his claim for a larger allowance for exhaustion, wear and tear, he was interested more in the benefit which would be derived in the matter of reduction of taxes to be paid for the years involved than in the actual depreciation sustained by the property. It might be that, when considered separately, some few items of equipment, such as trays, etc., listed as miscellaneous equipment and dies and parts, constituting a very small portion of the total equipment, depreciated at a rate slightly greater than 10 per cent per annum, but when we consider the entire machinery and equipment account, we are satisfied that the actual exhaustion, wear and tear of a considerable portion thereof was less than 10 per cent. On the whole, we are of the opinion that the allowance made by the Commissioner through the use of a composite rate of 10 per cent per annum on the entire machinery and equipment account was reasonable, and his action in this regard is approved.

It appears that the Commissioner through a misunderstanding of the facts capitalized the amount of $1,419.43 as representing an amount paid to a superintendent in connection with the construction of an addition to the plant of the partnership. The evidence shows that this represented wages paid to employees engaged in the manufacture of macaroni and was, therefore, a proper deduction from gross income as an ordinary and necessary business expense for the year 1920.

We are satisfied from the evidence that the sale by the partnership of 436,000 Italian lire to Joseph Binenstock in the year 1920 for $15,129.20 was a boom fide transaction, and the loss claimed should be allowed.

The Board is of the opinion that, upon consideration of all the evidence, the Commissioner’s allowance for exhaustion, wear and tear of automobiles at the rate of 20 per cent per annum was reasonable. The witness who testified in this regard merely stated that he thought the automobiles used by the partnership had a useful life of only four years. He apparently knew very little about the matter. He testified that the partnership had only Ford automobiles and that after they had been in use for about four years they were abandoned and discarded. There is other evidence which shows that the partnership had three different makes' of passenger automobiles which were used by salesmen in the City of Philadelphia, and that in addition, certain automobile trucks Avere used for delivery purposes. There is evidence that these automobiles were traded in from time to time at substantial amounts for new automobiles. The evidence on this point is not sufficient to warrant us in disturbing the allowance made by the Commissioner for depreciation on automobiles.

The partnership employed the accrual method of accounting in keeping its books. Some time in the year 1921 a fire occurred in the plant and destroyed certain merchandise which was fully covered by insurance. The insurance company admitted liability for the loss, but when the year 1921 ended, the amount of the fire loss had not been completely adjusted and the partnership and the insurance company were not in agreement as to the amount of the loss sustained as a result of the fire, and as to the total amount of money that the insurance company should pay. The insurance company had conceded the larger portion of the loss claimed by the partnership. Subsequently, in the years 1922 and 1923, the insurance company paid the full amount of the loss claimed by the partnership. The Commissioner allowed the total loss claimed by the partnership in the year 1921 and applied against the same in that year the amount of the insurance received thereon. We think that the Commissioner’s action in this regard was correct. The partnership was compensated by insurance for the total loss sustained in the year 1921. The insurance due petitioners for the loss sustained, accrued in the year 1921 and was properly applied in that year against the amount of the loss by fire.

Petitioners claim that one-half of the amounts of $886.25 and $2,007.74, hereinbefore mentioned, expended in connection with plumbing and heating equipment, should be allowed as a deduction in the year 1923 as an ordinary and necessary expense upon the ground that that portion represented the cost of rearranging the plumbing and heating equipment in the old building so as to make it conform to the equipment in the new addition. The evidence in support of this claim is not convincing. There is testimony from petitioners’ witness who testified on this point, that these amounts represented the cost of additional plumbing and heating equipment installed in the old as well as in the new building. The evidence is insufficient to show that the Commissioner erred in restoring these items to capital account.

The item of $520 expended for whitewashing the old building in order to make it conform in appearance to the new addition, appears to have been a minor item of expense and was, therefore, a proper deduction from gross income for the year 1923. The whitewash applied to the building had a useful life of only about six months.

Judgment will be entered on 16 days' notice-under rule 60.

Considered by Smith and Love.


text:
    Northern Trust Co., Bertha D. Nartzik, and Harold F. White, Executors, Estate of Julius J. Nartzik, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4316.
    Promulgated October 10, 1927.
    Additional compensation wliicb tbe decedent did not receive during the taxable year, and which the corporation owing the same had not sufficient funds at the end of the taxable year to pay, was not income to the decedent.

      Lee I. Parle, Esq., and Marry B. Sutter, Esq., for the petitioners.

      L. G. Mitchell, Esq., for the respondent.
    The Commissioner determined deficiencies of $3,613.57 for the calendar year 1919 and $6,061.45 for the calendar year 1920. The executors contest only the deficiency for 1920, which they claim is erroneous in that the Commissioner held that $25,000 additional compensation allowed and credited to the decedent by J. J. Nartzik, Inc., was not received by the decedent during the taxable year 1920. The position of the Commissioner is that the additional compensation of $25,000 was constructively received by the decedent during the year 1920 and was therefore taxable income to him in that year.
    FINDINGS OF FACT.
    Julius J. Nartzik died January 29, 1921, and the Northern Trust Co., Bertha D. Nartzik, and Harold F. White are the duly appointed and acting executors of his estate. In the fall of 1919, Julius J. Nartzik incorporated a business which had theretofore been conducted by him individually. The capital stock of the corporation consisted of $100,000 par value of preferred stock and $200,000 par value of common stock. All of the common stock was originally issued to the decedent but soon thereafter he transferred $15,000 par value of this stock to about 15 employees of the corporation and took their notes therefor to be paid out of dividends declared upon the stock. The decedent was the president of the corporation. During the calendar year 1920 the corporation authorized a bonus of additional compensation to Julius J. Nartzik for services rendered. The books of the corporation, which were kept upon an accrual basis, were not closed until some time in February, 1921, at which time the additional compensation of $25,000 was credited to the personal account of Julius J. Nartzik as of December 31, 1920. The decedent kept his personal books upon the cash receipts and disbursements basis and his individual income-tax return for the calendar year 1920 made by the executors was upon the basis of actual receipts and disbursements. The executors did not include the $25,000 additional compensation as income to the decedent in the individual income-tax return filed after his death for the calendar year 1920.
    The Commissioner held that the amount of $25,000 “ was constructively received by the taxpayer as of December 31, 1920.” He gave as his reason for his action that “ There is nothing in the record to indicate that the item of $25,000 was not absolutely transferred from one account to the individual account of the taxpayer; that there existed any substantial limitation or restriction as to the time or manner of payment or condition upon which payment was to be made. Neither is there any evidence to the effect that the amount in question was not unqualifiedly subject to the demands of the taxpayer. That the sum was not paid to the taxpayer during his lifetime or to his estate subsequent to his death is not considered of particular significance in view of the fact that he and his estate owned practically the entire issue of capital stock.” The corporation did not have on hand during the last months of the year 1920 sufficient cash with which to pay the full amount of the additional compensation authorized to the decedent. The current operations of the corporation during the latter part of 1920 were such that at times the corporation was overdrawn. There was not during the year 1920, talcing together all the funds of the corporation wherever located, sufficient funds available to pay this bonus. The largest cash balance of the corporation during the year 1920 was on December 21, when there existed a balance of $21,251.50. The smallest balance during the same year occurred on December 16, when there was an overdraft of $684.23. On December 31, 1920, the corporation had a total cash balance of $2,148.49.
   OPINION.

Littleton :

Before it should be held that a taxpayer constructively received income in any taxable year -when he did not, in fact, come into possession of the money or property, it should appear beyond question that the taxpayer, although at liberty, considering the financial requirements, and needs of the corporation, to withdraw the amount due him, deliberately chose not to draw or receive the amount owing by the corporation. As was said by the Board in John A. Brander, 3 B. T. A. 231, “ It was not that the corporation would not pay, but rather that he would not receive. This election to give the corporation the temporary use of the amount was an exercise by him of its enjoyment, and this is one of the primary attributes of income.” The $25,000 in question was not sufficiently available for the decedent’s use to constitute a constructive receipt by him. The theory of constructive receipt of income should not be extended beyond the principle announced by the Board in John A. Brander, supra, and this proceeding is clearly not within the rule announced in that appeal. The fact that the decedent owned practically all of the stock of the corporation had nothing to do with the question whether he received income. The Commissioner argues that “ the Board is wholly without information as to the corporation’s ability to borrow money or to pay it [the bonus] from other sources than its balances of cash held in banks.” The mere fact that a creditor of the taxpayer might borrow sufficient money or sell some of its assets and realize sufficient cash to pay the taxpayer the amount due does not make the taxpayer in receipt of income on the cash basis. We are satisfied from the facts in this proceeding that the $25,000 was not received by the petitioner within the calendar year 1920 within the meaning of the statute and was not, therefore, income for that year.

Judgment will be entered on 15 days’ notice, under Bule 50.

Considered by Smith and Love.


text:
    J. F. Irwin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9392.
    Promulgated October 10, 1927.
    Tlie evidence shows that a bonus of $3,000 was an accrued liability of the petitioner for the year 1920, and was, therefore, a proper deduction from gross income.

      Frederick Schwertner, Esq., for the petitioner.

      Ohas. H. Gurl, Esq., for the respondent.
   Littleton:

The Commissioner determined a deficiency in income tax of $2,415.52 for the calendar year 1920.

Petitioner claims that the Commissioner erred in refusing to allow a deduction of $3,000, representing additional compensation paid to' an employee for services rendered during 1920. Petitioner withdrew a claim that the Commissioner had erred in refusing to allow a deduction on account of certain alleged worthless debts.

FINDINGS OE FACT.

Petitioner is a resident of Latrobe, Pa., where he was, during the taxable year, engaged in the coal and coke brokerage business. He kept his books and rendered his returns upon an accrual basis.

For the calendar year 1920, he filed an income-tax return showing a net income from his business of $43,920.52, and paid a tax of $10,067.69. Among other deductions claimed in this return was a deduction of $3,000 representing a portion of the compensation of one of his employees.

During 1920 and for years prior thereto, petitioner had in his employ one A. I. Hurning, who was experienced in petitioner’s business. Hurning had charge of the office work and made sales of coal and coke. Petitioner was absent from his place of business a great deal of the time selling coal and coke, and during such absence Hurn-ing had entire charge of the business. During the year 1920, the coal business was very active and it was difficult to secure or retain the services of experienced employees. Early in the year 1920, petitioner and Hurning discussed the matter of the latter’s compensation for that year and petitioner agreed to increase Hurning’s compensation and promised him that he would be paid a total of $12,000 compensation for the year, and that if the entire amount was not paid by the end of the year, the balance would be paid him in the form of a bonus. Hurning was paid various amounts monthly throughout the year. The matter of Hurning’s compensation was mentioned by petitioner at different times during the year and he reiterated his intention to pay Hurning the compensation mentioned.

The relations between petitioner and Hurning were very close and although Hurning had charge of the bookkeeping, he made no entry in the books, concerning his compensation for the year prior to December 81, 1920, other than the monthly withdrawals. Early in 1921, before the books for the year 1920 were closed, the bonus in the amount of $3,000 was entered upon the books as an accrued expense for the year 1920, and this amount was paid to Hurning.

The entire compensation of Hurning, including the bonus of $3,000, was no more than reasonable compensation for the services rendered by him. The $3,000 was a proper deduction from gross income for 1920.

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

Considered by Smith and Love.